We show that there are two distinct ways to make volatility stochastic that are differentiated by their consequences for skewness. Most models in the literature have adopted the relatively tractable methodology of using stochastic time changes to engineer stochastic volatility. Unfortunately,...

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...