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I am considering extending a multi-factor fixed income stochastic model (e.g. LIBOR-Market) to use stochastic correlation matrices instead of determinstic ones.

For pricing instruments with short maturities stochastic correlation would not really make sense - for the correlation structure is in general much more stable than the volaltility. Thus in the short run it is often sufficient to work with a determinstic correlation.

Instruments with long maturities (as often encountered in fixed income markets) are a different matter entirely.


  • Are there precedents of such models (either equity or fixed income)?
  • Whould the added value be worth the effort ? (or is it enough to deal with stochastic volatility which is certainly more important)
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