As unspanned stochastic volatility (USV) models gain popularity in the literature, bivariate USV models (with one spanned and one unspanned factor) become a fundamental model class: they are the simplest USV models that are potentially useful, and (like general one-factor models) they are...

I study the relationship between interest rates and interest-rate volatility, particularly the idea of unspanned stochastic volatility (USV): volatility risk that cannot be hedged with bonds or swaps. Simulated data is used to assess the ability of regression-based techniques, popular but...

Certain models of the term structure of interest rates exhibit unspanned stochastic volatility (USV). A model has this property if it involves a source of stochastic variation — called an unspanned factor — that does not affect the model's interest rates directly, but does affect the extent...

This draft paper outlines a term structure model that models the short rate as a sum of n Gaussian processes (a 'Gn' model). It is shown that the given specification involves no redundant parameters and gives rise to a non-trivial multifactor term structure model. A closed-form expression,...

Interest-rate benchmark reform has revived short-rate modelling. One reason is that short-rate models provide a consistent framework in which different benchmarks, and contracts linked to them, can be compared. Another reason is that new benchmarks can be directly dependent on very short-term...

Modelling the risk that a financial institution may not be able to roll over short-term borrowing at the market reference rate, we derive the dynamics of (interbank) reference term rates (e.g., LIBOR) and their spread vis-à-vis benchmarks based on overnight reference rates, e.g., rates implied...