What variable represents the volatility of rates in the CIR model?

In the Cox-Ingersoll-Ross (CIR) model, the variable that represents the volatility of interest rates is denoted by sigma. The CIR model is a popular framework used for modeling the dynamics of interest rates as mean-reverting processes. This means that the interest rates tend to move towards a long-term average over time.

In this model, sigma specifically captures the degree of fluctuation or volatility in the interest rates. A higher value of sigma indicates greater variability in the rates, while a lower value suggests that the rates will exhibit more stability and less erratic behavior.

The other variables in the model have different interpretations: k represents the speed of reversion to the mean, theta signifies the long-term mean level of the interest rates, and r typically denotes the current interest rate level. Thus, it is sigma that captures the essential characteristic of the volatility in the interest rate movements as modeled by the CIR framework.