UCL Discovery
UCL home » Library Services » Electronic resources » UCL Discovery

Rational Savings Account Models for Backward-Looking Interest Rate Benchmarks

Macrina, A; Skovmand, D; (2020) Rational Savings Account Models for Backward-Looking Interest Rate Benchmarks. Risks , 8 (1) p. 23. 10.3390/risks8010023. Green open access

[img]
Preview
Text
RSABLB-PUBLISHED-Risks-08-00023.pdf - Published version

Download (423kB) | Preview

Abstract

Interest rate benchmarks are currently undergoing a major transition. The LIBOR benchmark is planned to be discontinued by the end of 2021 and superseded by what ISDA calls an adjusted risk-free rate (RFR). ISDA has recently announced that the LIBOR replacement will most likely be constructed from a compounded running average of RFR overnight rates over a period matching the LIBOR tenor. This new backward-looking benchmark is markedly different when compared with LIBOR. It is measurable only at the end of the term in contrast to the forward-looking LIBOR, which is measurable at the start of the term. The RFR provides a simplification because the cash flows and the discount factors may be derived from the same discounting curve, thus avoiding—on a superficial level—any multi-curve complications. We develop a new class of savings account models and derive a novel interest rate system specifically designed to facilitate a high degree of tractability for the pricing of RFR-based fixed-income instruments. The rational form of the savings account models under the risk-neutral measure enables the pricing in closed form of caplets, swaptions and futures written on the backward-looking interest rate benchmark.

Type: Article
Title: Rational Savings Account Models for Backward-Looking Interest Rate Benchmarks
Open access status: An open access version is available from UCL Discovery
DOI: 10.3390/risks8010023
Publisher version: https://doi.org/10.3390/risks8010023
Language: English
Additional information: This is an open access article distributed under the Creative Commons Attribution License (https://creativecommons.org/licenses/by/4.0/) which permits unrestricted use, distribution, and reproduction in any medium, provided the original work is properly cited
Keywords: LIBOR; SOFR; SONIA; LIBOR transition; risk-free rates; rational term structure models; swaptions; caplets; futures
UCL classification: UCL
UCL > Provost and Vice Provost Offices
UCL > Provost and Vice Provost Offices > UCL BEAMS
UCL > Provost and Vice Provost Offices > UCL BEAMS > Faculty of Maths and Physical Sciences
UCL > Provost and Vice Provost Offices > UCL BEAMS > Faculty of Maths and Physical Sciences > Dept of Mathematics
URI: https://discovery.ucl.ac.uk/id/eprint/10093236
Downloads since deposit
16Downloads
Download activity - last month
Download activity - last 12 months
Downloads by country - last 12 months

Archive Staff Only

View Item View Item