II. Module 6 Homework 3 [final]: Discrete-Time Vasicek Meets Fama and Bliss

Let's modify the basic Vasicek term structure model, and see if we can account for Fama-Bliss regressions. The basic model has a constant market price of risk. We need to have a time-varying price of risk. The obvious way to do that is just to make the price of risk depend on the single factor, which is the only thing that's time varying in this model. (More realistically, we add more factors, but not in a homework!