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Convergence models of interest rates are used to model a situation, where a country is going to enter a monetary union and its short rate is affected by the short rate in the monetary union. In addition, Wiener processes which model random shocks in the behaviour of the short rates can be correlated. In this paper we consider a stochastic correlation in a selected convergence model. A stochastic correlation has been already studied in different contexts in financial mathematics, therefore we distinguish differences which come from modelling interest rates by a convergence model. We provide meaningful properties which a correlation model should satisfy and afterwards we study the problem of solving the partial differential equation for the bond prices. We find its solution in a separable form, where the term coming from the stochastic correlation is given in its series expansion for a high value of the correlation.

On the bond pricing partial differential equation in a convergence model of interest rates with stochastic correlation