The search for a new reference rate

Ahmed Baig () and Drew B. Winters ()
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Ahmed Baig: Boise State University
Drew B. Winters: Rawls College of Business At Texas Tech University

Review of Quantitative Finance and Accounting, 2022, vol. 58, issue 3, No 3, 939-976

Abstract: Abstract The LIBOR manipulation scandal of 2008 spurred extensive policy debates regarding the importance of market-based reference rates. The alternative reference rates committee (ARRC) eventually identified the secured overnight financing rate (SOFR) to be a suitable replacement to LIBOR. In this study, we question the underlying process behind the choice of SOFR as a replacement for LIBOR. Both academic literature and regulatory bodies fail to identify a consistent definition and criteria of a good reference rate. We fill in this gap in the literature by providing an empirically testable ‘checklist’ to evaluate any potential money market rate to gauge its suitability as a reference rate. We also carry out an empirical evaluation of various money market rates against our criteria and identify the 1-month AA non-financial commercial paper rate as the best available replacement for LIBOR.

Keywords: Benchmark rate; Calendar regularities; LIBOR replacement; Reference rate; SOFR (search for similar items in EconPapers)
JEL-codes: E58 G21 G23 G28 (search for similar items in EconPapers)
Date: 2022
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DOI: 10.1007/s11156-021-01014-y

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