Is there a way to stay with the short rate model (like HW2F or G2++) but extend it to capture vol term structure (vol smile or skew). What happens if I calibrate HW2F to OTM swaptions? (I don't want to use calibration to caps as they almost always ignore correlation). Thanks!


1 Answer 1


Local and/or stochastic vol extensions of HW (incl. multi-factor) were produced around the mid 1990s, more or less independently in a number of research papers, the most notable being Cheyette (1992) and Ritchken-Sankarasubramanian (1995). Quants generally call the one-factor extension "Cheyette Model" and the multi-factor version "Multi-Factor Cheyette" or MFC.

You may see the whole story in Andersen and Piterbarg 3-volume "bible" on interest rate models. Andreasen published a risk paper in 2005, with a practical implementation and calibration with stochastic volatility. I also have some professional training notes here: https://www.slideshare.net/AntoineSavine/introduction-to-interest-rate-models-117627629. I hope this helps.

  • $\begingroup$ Great slides, and congrats on your new book $\endgroup$
    – Canardini
    Commented Sep 26, 2020 at 21:25
  • $\begingroup$ Antoine, what would you recommend today as a workhorse rate model then ? I see Mercurio's FMM for instance, but is it really necessary ? $\endgroup$
    – Olórin
    Commented Sep 7, 2023 at 17:21

Your Answer

By clicking “Post Your Answer”, you agree to our terms of service and acknowledge you have read our privacy policy.

Not the answer you're looking for? Browse other questions tagged or ask your own question.