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Inferring Term Rates from SOFR Futures Prices

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  • Erik Heitfield
  • Yang-Ho Park

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.

Suggested Citation

  • Erik Heitfield & Yang-Ho Park, 2019. "Inferring Term Rates from SOFR Futures Prices," Finance and Economics Discussion Series 2019-014, Board of Governors of the Federal Reserve System (US).
  • Handle: RePEc:fip:fedgfe:2019-14
    DOI: 10.17016/FEDS.2019.014
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    File URL: https://www.federalreserve.gov/econres/feds/files/2019014pap.pdf
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    References listed on IDEAS

    as
    1. Lloyd, S. P., 2017. "Overnight Indexed Swap Market-Based Measures of Monetary Policy Expectations," Cambridge Working Papers in Economics 1733, Faculty of Economics, University of Cambridge.
    2. Longstaff, Francis A., 2000. "The term structure of very short-term rates: New evidence for the expectations hypothesis," Journal of Financial Economics, Elsevier, vol. 58(3), pages 397-415, December.
    3. Lars E.O. Svensson, 1994. "Estimating and Interpreting Forward Interest Rates: Sweden 1992 - 1994," NBER Working Papers 4871, National Bureau of Economic Research, Inc.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    Interest rates ; Futures ; Reference rates ; Financial contracts ; LIBOR ; SOFR;

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation

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