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Bloomberg, in its documentation, explains that it calculates the short rate volatility for its Hull White implementation by multiplying the e.g. 10y IRS rate (divided by 100) by the 10y cap vol.


I must be missing something obvious.


Finally got a response in terms of more documentation, and a half sentence that mentions lognormal vs normal, which I'm assuming means they are saying that the cap vol is a Black (i.e. lognormal) volatility of dr/r, but we want a normal volatility for the Hull-White model of dr (which they use). So multiply by r both sides.

Which is, I suppose, approximately the right idea? Except why the 10y cap vol and 10y rate, when the Hull-White model is a one-factor model of the short rate; the 10y rate is not the short rate, even if we assume the volatility is constant and equal to the value at 10y.

share|improve this question
Maybe ask Bloomberg? – Joshua Ulrich Feb 11 '14 at 14:28
It's too much for their customer service people; producing the document that I got that formula from is all they can do. – Phil H Feb 11 '14 at 14:29
You mean it's not in their manual of scripts?!? :) I meant: call your Bloomberg representative. – Joshua Ulrich Feb 11 '14 at 14:32
That doesn't sound right, definitely help help that and escalate until you get a better answer. – experquisite Feb 11 '14 at 19:46

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