Inferring Term Rates from SOFR Futures Prices

Erik Heitfield and Yang-Ho Park
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Erik Heitfield: https://www.federalreserve.gov/econres/erik-a-heitfield.htm
Yang-Ho Park: https://www.federalreserve.gov/econres/yang-ho-park.htm

No 2019-014, Finance and Economics Discussion Series from Board of Governors of the Federal Reserve System (U.S.)

Abstract: The Alternative Reference Rate Committee, a group of private-sector market participants convened by the Federal Reserve, has recommended that markets transition to the use of the Secured Overnight Financing Rate (SOFR) in financial contracts that currently reference US dollar LIBOR. This paper examines the feasibility of using SOFR futures prices to construct forward-looking term reference rates that are conceptually similar to the term LIBOR rates commonly used in loan contracts. We show that futures-implied term SOFR rates have closely tracked federal funds OIS rates over the eight months since SOFR futures began trading. To examine the performance of our approach over a longer time horizon, we compare term rates derived from federal funds futures with observed overnight rates and OIS rates from 2000 to the present. Consistent with prior research, we find that futures-implied term rates accurately predict realized compounded overnight rates during most periods.

Keywords: Interest rates; Futures; Reference rates; Financial contracts; LIBOR; SOFR (search for similar items in EconPapers)
JEL-codes: G12 G18 (search for similar items in EconPapers)
Pages: 24 pages
Date: 2019-03-05
New Economics Papers: this item is included in nep-fmk
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (10)

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Persistent link: https://EconPapers.repec.org/RePEc:fip:fedgfe:2019-14

DOI: 10.17016/FEDS.2019.014

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