I understand while equity derivatives require the modelling of stock price at expiry, interest rate derivatives typically require modeling both the expiry and tenor, thus increasing the dimensionality of the underlying factors by one. Other than the modeling/ calibration of the yield curve, what are the other challenges in modelling IR derivatives in general?

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    $\begingroup$ The volatilities of different tenors on the yield curve are different​ and interest rates are used for discounting the derivative as well as defining its payoff $\endgroup$ – David Duarte Jan 15 at 21:04
  • $\begingroup$ "what are the other challenges in modelling IR derivatives in general?" - move to negative rates; move from single to multiple curve discounting post-GFC; shift in RFR. $\endgroup$ – user42108 Jan 15 at 23:42
  • $\begingroup$ In addition, these derivatives are typically traded over-the-counter by voice traders in large clips, so data is lumpy (in ticket size and in trade time) and hard to get hold of when you come to fitting your vol cubes. By contrast, equity and equity derivs trade mostly on lit exchanges in small tickets, high fidelity continuous tick data is available very cheaply (and going back 30+ years if required!). $\endgroup$ – StackG Jan 16 at 13:18

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