A Note on Correlation in Stochastic Volatility Term Structure Models
8 Pages Posted: 2 Oct 2007
Date Written: September 2007
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: Suggested Citation