What does this mean:

"Front-end vols have been trading lognormally while longer tails have traded normally."

I read this in a research report, in the context of swaptions, which does not explain this further. My limited knowledge tell me it has something to do with correlation of vol with rates but I'm not sure. Could someone please help?


1 Answer 1


Typically, strategists run a regression of changes in implied vols against changes in rates. If rates are highly directional with implied vols (regression coefficient is positive and statistically significant), then it would imply a more lognormal relationship. If the two series are not correlated or very weakly correlated, then the relationship is considered more normal.

So what this guy is saying is that the "top-left" corner of the vol surface has been more directional with rates (rates go higher, vols go higher), while longer tails (10y-30y tails) are less directional.


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