Decomposing LIBOR in Transition: Evidence from the Futures Markets

2022/01/18 by David Skovmand, Skovmand, David, Jacob Bjerre Skov +1
Economics, Econometrics and Finance · #FOS: Economics and business #Financial Markets and Investment Strategies #General Finance (q-fin.GN) #Market Dynamics and Volatility #Monetary Policy and Economic Impact #Statistical Finance (q-fin.ST)

paper · pdf · doi:10.48550/arxiv.2201.06930

openalex publication_date 2022/01/18 · openalex created_date 2025/10/10 · openalex updated_date 2026/07/28

Abstract

Applying historical data from the USD LIBOR transition period, we estimate a joint model for SOFR, Fed 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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