A Note on Correlation in Stochastic Volatility Term Structure Models

8 Pages Posted: 2 Oct 2007

See all articles by Massimo Morini

Massimo Morini

Banca IMI; Bocconi University

Fabio Mercurio

Bloomberg L.P.

Date Written: September 2007

Abstract

We present a simple methodology to guarantee that the total correlation structure in a Term Structure Model with one stochastic volatility factor remains positive semidefinite. We design the parameterization with the purpose of keeping as much freedom as possible for the correlation of interest rates and stochastic volatility, while letting the correlation among forward rates reproduce approximately the tendencies usually considered desirable in the market.

Keywords: correlation, stochastic volatility, libor market model

JEL Classification: G13, C63

Suggested Citation

Morini, Massimo and Mercurio, Fabio, A Note on Correlation in Stochastic Volatility Term Structure Models (September 2007). Available at SSRN: https://ssrn.com/abstract=1018024 or http://dx.doi.org/10.2139/ssrn.1018024

Massimo Morini (Contact Author)

Banca IMI ( email )

Corso Matteotti 6
20121 Milano, 20100
Italy

Bocconi University ( email )

Via Sarfatti, 25
Milan, MI 20136
Italy

Fabio Mercurio

Bloomberg L.P. ( email )

731 Lexington Avenue
New York, NY 10022
United States

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