Lost in the LIBOR transition

Alex Backwell, Andrea Macrina, Erik Schlogl and David Skovmand

Quantitative Finance, 2025, vol. 25, issue 1, 17-30

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.

Date: 2025
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DOI: 10.1080/14697688.2024.2436651

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