1
$\begingroup$

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.

Questions:

  • 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)
$\endgroup$

Your Answer

By clicking “Post Your Answer”, you agree to our terms of service, privacy policy and cookie policy

Browse other questions tagged or ask your own question.