IDEAS home Printed from https://ideas.repec.org/a/kap/rqfnac/v58y2022i3d10.1007_s11156-021-01014-y.html
   My bibliography  Save this article

The search for a new reference rate

Author

Listed:
  • Ahmed Baig

    (Boise State University)

  • Drew B. Winters

    (Rawls College of Business At Texas Tech University)

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.

Suggested Citation

  • Ahmed Baig & Drew B. Winters, 2022. "The search for a new reference rate," Review of Quantitative Finance and Accounting, Springer, vol. 58(3), pages 939-976, April.
    • Handle: RePEc:kap:rqfnac:v:58:y:2022:i:3:d:10.1007_s11156-021-01014-y
    DOI: 10.1007/s11156-021-01014-y
    as

    Download full text from publisher

    File URL: http://link.springer.com/10.1007/s11156-021-01014-y
    File Function: Abstract
    Download Restriction: Access to full text is restricted to subscribers.
    File URL: https://libkey.io/10.1007/s11156-021-01014-y?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Bryan J. Noeth & Rajdeep Sengupta, 2010. "Flight to safety and U.S. Treasury securities," The Regional Economist, Federal Reserve Bank of St. Louis, issue Jul, pages 18-19.
    2. Griffiths, Mark D. & Winters, Drew B., 1995. "Day-of-the-week effects in federal funds rates: Further empirical findings," Journal of Banking & Finance, Elsevier, vol. 19(7), pages 1265-1284, October.
    3. Darrell Duffie & Piotr Dworczak & Haoxiang Zhu, 2017. "Benchmarks in Search Markets," Journal of Finance, American Finance Association, vol. 72(5), pages 1983-2044, October.
    4. Mark D. Griffiths & Drew B. Winters, 2005. "The Turn of the Year in Money Markets: Tests of the Risk-Shifting Window Dressing and Preferred Habitat Hypotheses," The Journal of Business, University of Chicago Press, vol. 78(4), pages 1337-1364, July.
    5. Ogden, Joseph P., 1987. "The End of the Month as a Preferred Habitat: A Test of Operational Efficiency in the Money Market," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 22(3), pages 329-343, September.
    6. Daniel Covitz & Nellie Liang & Gustavo A. Suarez, 2013. "The Evolution of a Financial Crisis: Collapse of the Asset-Backed Commercial Paper Market," Journal of Finance, American Finance Association, vol. 68(3), pages 815-848, June.
    7. Marcin Kacperczyk & Philipp Schnabl, 2010. "When Safe Proved Risky: Commercial Paper during the Financial Crisis of 2007-2009," Journal of Economic Perspectives, American Economic Association, vol. 24(1), pages 29-50, Winter.
    8. Bollerslev, Tim, 1986. "Generalized autoregressive conditional heteroskedasticity," Journal of Econometrics, Elsevier, vol. 31(3), pages 307-327, April.
    9. Park, Sang Yong & Reinganum, Marc R., 1986. "The puzzling price behavior of treasury bills that mature at the turn of calendar months," Journal of Financial Economics, Elsevier, vol. 16(2), pages 267-283, June.
    10. James R. Booth, 1994. "The persistence of the prime rate," FRBSF Economic Letter, Federal Reserve Bank of San Francisco, issue may20.
    11. Kotomin, Vladimir & Winters, Drew B., 2007. "The impact of the return to lagged reserve requirements on the federal funds market," Journal of Economics and Business, Elsevier, vol. 59(2), pages 111-129.
    12. Blau, Benjamin M., 2018. "Exchange rate volatility and the stability of stock prices," International Review of Economics & Finance, Elsevier, vol. 58(C), pages 299-311.
    13. Gorton, Gary & Metrick, Andrew, 2012. "Securitized banking and the run on repo," Journal of Financial Economics, Elsevier, vol. 104(3), pages 425-451.
    14. Mark D. Griffiths & Drew B. Winters, 1997. "The Effect of Federal Reserve Accounting Rules on the Equilibrium Level of Overnight Repo Rates," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 24(6), pages 815-832.
    15. Duffie, Darrell & Dworczak, Piotr, 2021. "Robust benchmark design," Journal of Financial Economics, Elsevier, vol. 142(2), pages 775-802.
    16. Baig, Ahmed & Winters, Drew B., 2018. "A preferred habitat for liquidity in term repos: Before, during and after the financial crisis," Journal of Economics and Business, Elsevier, vol. 99(C), pages 1-14.
    17. Mark D. Griffiths & Drew B. Winters, 1997. "The Effect of Federal Reserve Accounting Rules on the Equilibrium Level of Overnight Repo Rates," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 24(6), pages 815-832, July.
    18. Peter C. Eisemann & Stephen G. Timme, 1984. "Intraweek Seasonality In The Federal Funds Market," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 7(1), pages 47-56, March.
    19. Vladimir Kotomin, 2013. "The Year-End Effect In Money Market Yields: Beyond One Month And Beyond The Crisis," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 36(2), pages 233-252, June.
    20. Darrell Duffie & Jeremy C. Stein, 2015. "Reforming LIBOR and Other Financial Market Benchmarks," Journal of Economic Perspectives, American Economic Association, vol. 29(2), pages 191-212, Spring.
    21. Kotomin, Vladimir & Smith, Stanley D. & Winters, Drew B., 2008. "Preferred habitat for liquidity in international short-term interest rates," Journal of Banking & Finance, Elsevier, vol. 32(2), pages 240-250, February.
    22. Jordan, Susan D. & Jordan, Bradford D., 1991. "Seasonality in Daily Bond Returns," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 26(2), pages 269-285, June.
    23. Ken B. Cyree & Mark D. Griffiths & Drew B. Winters, 2003. "On the pervasive effects of Federal Reserve settlement regulations," Review, Federal Reserve Bank of St. Louis, vol. 85(Mar), pages 27-46.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Ahmed S. Baig & Drew B. Winters, 2021. "Month-End Regularities in the Overnight Bank Funding Markets," JRFM, MDPI, vol. 14(5), pages 1-16, May.
    2. Baig, Ahmed & Winters, Drew B., 2018. "A preferred habitat for liquidity in term repos: Before, during and after the financial crisis," Journal of Economics and Business, Elsevier, vol. 99(C), pages 1-14.
    3. Benjamin Munyan, 2015. "Regulatory Arbitrage in the Repo Market," Working Papers 15-22, Office of Financial Research, US Department of the Treasury.
    4. Mark Griffiths & Drew Winters, 1997. "On a Preferred Habitat for Liquidity at the Turn-of-the-Year: Evidence from the Term-Repo Market," Journal of Financial Services Research, Springer;Western Finance Association, vol. 12(1), pages 21-38, August.
    5. Kotomin, Vladimir & Smith, Stanley D. & Winters, Drew B., 2008. "Preferred habitat for liquidity in international short-term interest rates," Journal of Banking & Finance, Elsevier, vol. 32(2), pages 240-250, February.
    6. Demiralp, Selva & Preslopsky, Brian & Whitesell, William, 2006. "Overnight interbank loan markets," Journal of Economics and Business, Elsevier, vol. 58(1), pages 67-83.
    7. Vladimir Kotomin & Stanley Smith & Drew Winters, 2014. "Interest-rate and calendar-time effects in money market fund and bank deposit cash flows," Journal of Economics and Finance, Springer;Academy of Economics and Finance, vol. 38(1), pages 84-95, January.
    8. Kotomin, Vladimir & Winters, Drew B., 2007. "The impact of the return to lagged reserve requirements on the federal funds market," Journal of Economics and Business, Elsevier, vol. 59(2), pages 111-129.
    9. Vladimir Kotomin, 2021. "The clientele effect around the turn of the year: evidence from the bond markets," Journal of Economics and Finance, Springer;Academy of Economics and Finance, vol. 45(4), pages 637-653, October.
    10. Efraim Benmelech & Ralf R. Meisenzahl & Rodney Ramcharan, 2017. "The Real Effects of Liquidity During the Financial Crisis: Evidence from Automobiles," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 132(1), pages 317-365.
    11. Kyle D. Allen & Drew B. Winters, 2021. "Auditor response to changing risk: money market funds during the financial crisis," Review of Quantitative Finance and Accounting, Springer, vol. 56(3), pages 1057-1086, April.
    12. Eisenbach, Thomas M., 2017. "Rollover risk as market discipline: A two-sided inefficiency," Journal of Financial Economics, Elsevier, vol. 126(2), pages 252-269.
    13. Duffie, Darrell & Dworczak, Piotr, 2021. "Robust benchmark design," Journal of Financial Economics, Elsevier, vol. 142(2), pages 775-802.
    14. Li, Yi, 2021. "Reciprocal lending relationships in shadow banking," Journal of Financial Economics, Elsevier, vol. 141(2), pages 600-619.
    15. Chen, Zhongdong & Schmidt, Adam & Wang, Jin’ai, 2021. "Retail investor risk-seeking, attention, and the January effect," Journal of Behavioral and Experimental Finance, Elsevier, vol. 30(C).
    16. Gorton, Gary & Metrick, Andrew & Xie, Lei, 2021. "The flight from maturity," Journal of Financial Intermediation, Elsevier, vol. 47(C).
    17. Xuewen Liu, 2023. "A Model of Systemic Bank Runs," Journal of Finance, American Finance Association, vol. 78(2), pages 731-793, April.
    18. Brown, Craig R. & Cyree, Ken B. & Griffiths, Mark D. & Winters, Drew B., 2008. "Further analysis of the expectations hypothesis using very short-term rates," Journal of Banking & Finance, Elsevier, vol. 32(4), pages 600-613, April.
    19. Sultanum, Bruno, 2018. "Financial fragility and over-the-counter markets," Journal of Economic Theory, Elsevier, vol. 177(C), pages 616-658.
    20. Aldasoro, Iñaki & Balke, Florian & Barth, Andreas & Eren, Egemen, 2022. "Spillovers of funding dry-ups," Journal of International Economics, Elsevier, vol. 137(C).

    More about this item

    Keywords

    Benchmark rate; Calendar regularities; LIBOR replacement; Reference rate; SOFR;
    All these keywords.

    JEL classification:

    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:kap:rqfnac:v:58:y:2022:i:3:d:10.1007_s11156-021-01014-y. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Sonal Shukla or Springer Nature Abstracting and Indexing (email available below). General contact details of provider: http://springer.com .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.