Thanks for you response!My main concern with the interpolation of volatility is the implication of negative forward vol in some cases. Consider the following simple example:one-year vol $$\sigma_1 = 0.2$$tow-year vol $$\sigma_2 = 0.15$$Linear interpolation results in 17.5% vol for one-and-half-year vol. This implies a negative forward vol between t=1.5 and t=2.I have found some helpful results here: http://finance.business.queensu.ca/psfi ... sed.pdfNow
, the question is: Are there any other alternatives to interpolation that market uses? (e.g. proxies or stale data) if yes, in what order of priority?