# Cox-Ingersoll-Ross Model - Explained

What is theCox-Ingersoll-Ross Model?

### What is the Cox-Ingersoll-Ross Model?

The Cox-Ingersoll-Ross model (CIR) is regarded as an interest rate model. It is a mathematical formula based on a stochastic differential equation in which one or more of the terms is a stochastic process, giving a solution known as a stochastic process. The Cox-Ingersoll-Ross model (CIR) is applicable in finance, it is a model that describes the evolution of interest rates. The CIR model is driven by market risk element, it is useful in modeling interest rate movements in the market. The model determines how interest rate evolve due to current volatility, mean rates and their spread. CIR uses mean reversion towards a long-term normal interest rate level.

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### How is the Cox-Ingersoll-Ross Model Used?

The Cox-Ingersoll-Ross (CIR) model was derived from the Vasicek Interest Rate model,which was also a mathematical formula used in the evaluation of interest rate movements. However, the Vasicek model does not include a square root component and it sometimes model negative interest rates. In the valuation process of interest rate derivatives, the Cox-Ingersoll-Ross model is often used. CIR explicitly describes the evolution of interest rates. John C. Cox, Jonathan E Ingersoll and Stephen A. Ross created the Cox-Ingersoll-Ross (CIR) model in 1985. CIR has an advantage over the Vasicek model because it does not allow for or model negative interest rates.