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Table 1
Functional forms for implied volatility smiles
This table presents regression results when the scaled implied flat volatility for euro interest rate caps and
floors, for various maturities, is regressed on a quadratic function of the Log Moneyness Ratio (LMR), as
follows:
2
*
3
*
2
1
LMR
c
LMR
c
c
IV
Scaled
+
+
=
The statistics are presented for the period, Jan 99 - May 01, for various maturities, based on data obtained from
WestLB Global Derivatives and Fixed Income Group. The coefficient and regression statistics are presented
for caps and floors pooled together, separately for bid and ask prices, for all maturities. An asterisk implies
significance at the 5% level.
Maturity
c1
c2
c3
Adj R
2
Ask
2-year 1.09* -0.62* 3.60* 0.64
3-year 1.09* -0.15* 1.84* 0.58
4-year 1.08* -0.06* 1.38* 0.62
5-year 1.11* 0.02 0.92* 0.57
6-year 1.11* 0.10* 0.50*
0.42
7-year 1.13* 0.19* 0.36* 0.25
8-year 1.08* 0.19* 0.11* 0.47
9-year 1.07* 0.18* 0.11* 0.51
10-year 1.13* 0.26* 0.07*
0.59
Bid
2-year 0.95* -0.72* 2.40* 0.53
3-year 0.98* -0.30* 0.87* 0.30
4-year 0.98* -0.17* 0.69* 0.33
5-year 0.99* -0.12* 0.55* 0.40
6-year 0.99* -0.01 0.36* 0.39
7-year 1.02* 0.11* 0.24* 0.52
8-year 0.98* 0.15* 0.07* 0.54
9-year 0.97* 0.14* 0.09* 0.59
10-year 1.03* 0.20* 0.06* 0.64
25