A quadratic volatility Cheyette model

Quasi-Gaussian or Cheyette interest rate models provide derivatives desks with solutions to some of the Libor market model’s problems in an explicitly Markovian representation. Here, Messaoud Chibane and Dikman Law introduce a local volatility extension and an efficient calibration scheme

The Libor market model either in its lognormal or extended stochastic volatility version as described in Piterbarg (2003) is a standard tool in almost all financial institutions. Whether used as a risk management model or solely for benchmarking purposes, it boasts substantial advantages such as intuitive primary variables, that is, the forward rates, simplicity of calibration through analytical swaption price approximations and straightforward Monte Carlo implementation. However, it has