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In this paper we propose an extension of the Libor market model with a high-dimensional specially structured system of square root volatility processes, and give a road map for its calibration. As such the model is well suited for Monte Carlo simulation of derivative interest rate instruments. As a key issue, we require that the local covariance structure of the market model is preserved in the stochastic volatility extension. In a case study we demonstrate that the extended Libor model allowsdoi:10.1515/mcma.2009.016 fatcat:hkamvgwogbb4jj22ntr6km5iui