Serving the Quantitative Finance Community

 
krs
Topic Author
Posts: 19
Joined: August 20th, 2019, 12:40 pm

LMM + Heston Model Simulation

December 22nd, 2020, 9:27 pm

Hi all, 

I am trying to simulate the Libor Market Model and the Heston Model together. I have got 30 forward rates to be simulated using LMM and 20 equities using the Heston model. 

For the forward rate correlation, I am using a parametrized form, corr(t,T) = \beta_0 + (1 - \beta_0) * exp(-\beta_1 * |T - t|), this is the correlation structure I have assumed in the calibration part as well.

On the other hand, I do not have any predefined structure of correlation among equities. 

How do I link the parametric form of correlation that I have used in the calibration of LMM with the historical data of equities? Should I consider building a hybrid model?

If I try to find a correlation matrix of 30 fwd rates + 20 equities, then I lose the parametric assumption on the correlation among fwd rates. 

Am I missing something obvious here?

thank you in advance,
K