A Note on Building Proxy Volatility Cubes

13 Pages Posted: 17 May 2019 Last revised: 25 May 2019

Date Written: May 2, 2019

Abstract

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

Mercurio, Fabio, A Note on Building Proxy Volatility Cubes (May 2, 2019). Available at SSRN: https://ssrn.com/abstract=3381666 or http://dx.doi.org/10.2139/ssrn.3381666

Fabio Mercurio (Contact Author)

Bloomberg L.P. ( email )

731 Lexington Avenue
New York, NY 10022
United States

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