Libor Swap Market Skew takes different shapes as of February month end. The profile of this skew for Receivers vs payers looks as shown in above table.
I have classified the skew to be Lognormal ( volatility rises proportianl to rates) and Norma (Rates are independent of volatilities). If the dynamics are some where in between then i will call it as Quarter power and square root.
For more detail looks for my previous postings on this topic
I really appericiate your post, this would really provide the great information .Thanks for sharing.
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I am wondering how did you classify different skew tobe different categories? I mean How did you quantify the differet slopes?
ReplyDeleteHi Lei,
ReplyDeleteSorry for late response.
Skew Classifcation can be done in two ways.
one observing actual market Risk reversal quotes and second way is actually calibrating vol surfaces for different skew types. Risk reversal quotes are available for only few parts of the surface. To avoid this lack of data availability i have chosen the later method. This will help me to make a comparison between market prices and calibrated prices. Hence i can establish the appropriate skew.
hope this answers your question
Chandra Khandrika