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Decomposing LIBOR in transition: evidence from the futures markets

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  • Jacob Bjerre Skov
  • David Skovmand

Abstract

Applying historical data from the USD LIBOR transition period, we estimate a joint model for SOFR, Federal Funds, and Eurodollar futures rates as well as spot USD LIBOR and term repo rates. The framework endogenously models basis spreads between each of the benchmark rates and allows for the decomposition of spreads. Modelling the LIBOR-OIS spread as credit and funding-liquidity roll-over risk, we find that the spike in the LIBOR-OIS spread during the onset of COVID-19 was mainly due to credit risk, while on average credit and funding-liquidity risk contribute equally to the spread.

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  • Jacob Bjerre Skov & David Skovmand, 2023. "Decomposing LIBOR in transition: evidence from the futures markets," Quantitative Finance, Taylor & Francis Journals, vol. 23(6), pages 959-978, June.
    • Handle: RePEc:taf:quantf:v:23:y:2023:i:6:p:959-978
    DOI: 10.1080/14697688.2023.2205438
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    Cited by:

    1. Claudio Fontana & Simone Pavarana & Wolfgang J. Runggaldier, 2023. "A stochastic control perspective on term structure models with roll-over risk," Finance and Stochastics, Springer, vol. 27(4), pages 903-932, October.

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