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We calibrate SABR on each expiry and tenor combination using market data. (e.g. 1mx10y, 3mx10y etc.) Then how about the non-standard expiry like 2.5mx10y? Do I linear interpolate the alpha, beta, rou parameters from 1mx10y and 3mx10y? Thanks

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  • $\begingroup$ Common practice would rather be to interpolate the implied volatility itself (or total implied variance) rather than the parameters. This because volatility is much more stable than the parameters. $\endgroup$ – JejeBelfort Apr 1 at 3:02
  • $\begingroup$ I don't entirely agree with that: I've seen the latter approach used, with the SABR specified as (atmVol, beta, rho, volvol) rather than (alpha, beta, rho, volvol), and (atmVol, beta, rho, volvol) interpolated in expiry and annuity for non standard expiries and/or tenors. $\endgroup$ – Antoine Conze Apr 1 at 15:18

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