The search for a new reference rate

Ahmed Baig; Drew B. Winters

doi:10.1007/s11156-021-01014-y

The search for a new reference rate

Ahmed Baig, Drew B. Winters

Finance Department

Texas Tech University

Research output: Contribution to journal › Article › peer-review

4 Scopus citations

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.

Original language	English
Pages (from-to)	939-976
Number of pages	38
Journal	Review of Quantitative Finance and Accounting
Volume	58
Issue number	3
DOIs	https://doi.org/10.1007/s11156-021-01014-y
State	Published - Apr 2022

Keywords

Benchmark rate
Calendar regularities
LIBOR replacement
Reference rate
SOFR

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10.1007/s11156-021-01014-y

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title = "The search for a new reference rate",

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 {\textquoteleft}checklist{\textquoteright} 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.",

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AB - 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.

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KW - Reference rate

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JO - Review of Quantitative Finance and Accounting

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The search for a new reference rate

Abstract

Keywords

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