Backwell, Alex;
Macrina, Andrea;
Schloegl, Erik;
Skovmand, David;
(2024)
Lost in the Libor Transition.
(SSRN Electronic Journal
).
Elsevier BV
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Abstract
In the face of the transition away from LIBOR-type term rate benchmarks in key jurisdictions such as the US and the UK, towards interest rate benchmarks based solely on overnight rates, this paper considers the information on the market's view of "roll-over'' or "refinancing'' risk, which is contained in term rate benchmarks, but lost in the transition to overnight benchmarks such as SONIA and SOFR. Considering Eurozone and, to a lesser extent, US data, we show that a model of this risk, when fitted to existing term rates for a subset of tenor frequencies, performs quite well in recovering the omitted tenors. This type of "out-of-sample-performance'' clearly demonstrates that term rate benchmarks such as LIBOR have substantial informational value above their (overnight) replacements, providing a rigorous underpinning to practitioners' reservations about the benchmark transition. In particular, in jurisdictions such as the Eurozone, which have not yet committed to eliminating the term rate benchmarks, our findings may contribute to the ongoing debate.
| Type: | Working / discussion paper |
|---|---|
| Title: | Lost in the Libor Transition |
| Open access status: | An open access version is available from UCL Discovery |
| DOI: | 10.2139/ssrn.4575993 |
| Publisher version: | http://dx.doi.org/10.2139/ssrn.4575993 |
| Language: | English |
| Additional information: | This version is the author accepted manuscript. For information on re-use, please refer to the publisher’s terms and conditions. |
| Keywords: | LIBOR benchmark reform, term rates, term risk and term premium, roll-over risk, term-based information differential, overnight interest rate benchmarks, SOFR, SONIA, OIS, interest rate swaps, basis risk |
| UCL classification: | UCL 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/10200789 |
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