QuoteOriginally posted by: karfeyQuoteOriginally posted by: bearishIf you analyze the behavior of USD interest rates, either on a historical basis or by looking at swaption implied vols, you are forced to conclude that the mean reversion parameter in a 1-factor Gaussian model is negative, unless you put a tremendous weight on the slope of the forward rate vols between 10 and 30 years. USD vol curves (as well as those of other major currencies I have looked at) are almost always hump-shaped, with the short end being tied down by central bank policy and the (very) long end being anchored by theoretical and common sense arguments. I sympathize with the desire to keep the rate model component of a complex modeling framework like CVA simple, but you are paying a price for it.Hi bearish, if you say mean reversion is negative, are you also saying the forward rates are highly correlated across all maturities?My basis is that mean reversion introduces auto-decorrelation to the system, so a very low, even negative mean reversion that is implied from the system, can only mean that there is very little decorrelation in the system.You will note that I specified the context to be a 1-factor Gaussian model, in which case the forward rates are perfectly correlated across all maturities, at least instantaneously. You can get much more realistic behavior with a 2-factor model, Gaussian or not. I think it is realistic to have one factor that has very high persistence (i.e. very low, but positive mean reversion) coupled with a negatively correlated second factor with a higher speed of mean reversion. This combination is one (but certainly not the only) way to generate the humped vol curve we tend to observe.