A Note on Building Proxy Volatility Cubes
13 Pages Posted: 17 May 2019 Last revised: 25 May 2019
Date Written: May 2, 2019
In this note, we introduce a simple approach for building volatility cubes of an interest-rate index based on the existing volatility cube of another index. Our approach can be formulated as a specific linear factor model, but it is dynamical in nature, and has the advantage of simple, explicit formulas for the ATM implied volatility and skew. As an example, we will construct SOFR volatility smiles from LIBOR-based ones.
Keywords: interest rates, volatility cube, proxy volatility, linear factor model, LIBOR, SOFR
JEL Classification: C22, C60, G13
Suggested Citation: Suggested Citation