This paper introduces a time-inhomogeneous parameterization of the forward LIBOR volatilities and analyzes its implications for the valuation of Bermudan swaptions. The model approximates the actual term structure of volatilities with a curve from a given set defined by the parametric...

This paper provides regime-switching stochastic volatility extensions of the LIBOR market model. First, the instantaneous forward LIBOR volatility is modulated by a continuous time homogeneous Markov chain. In a second parameterization, the volatility is modelled by a square root process with a...