Which variable in Term Structure Model 1 is normally distributed?

In the context of the Term Structure Model, particularly the one often referred to in financial literature, the variable that is typically modeled as being normally distributed is "dw." This variable represents a Brownian motion or a stochastic process that is used to model the random component of interest rates over time.

Brownian motion, by its nature, exhibits properties of normal distribution, making it an essential part of various financial models, including those used for pricing options and risk management. In the Term Structure Model, the changes in interest rates can be influenced by this stochastic process, hence making "dw" the correct choice.

The other variables mentioned in the question fulfill different roles in the model. "dr," for example, represents the change in the interest rate itself, which may not necessarily follow a normal distribution, especially if we consider the distribution of interest rates in practice. "sigma" represents volatility, which is often treated as a constant or as a function but is not inherently normally distributed within the models. "dt," on the other hand, usually denotes a small increment of time, which is a deterministic variable rather than a random one.

The understanding of the dynamics of interest rates under the term structure models relies heavily on stochastic calculus, where "dw" and its