Dynamic term structure models for SOFR futures
Research output: Contribution to journal › Journal article › Research › peer-review
The London InterBank Offered Rate is scheduled for discontinuation, and the replacement advocated by US regulators is the Secured Overnight Financing Rate (SOFR). The only SOFR-linked derivative with significant liquidity and trading history is the SOFR futures contract, traded at the Chicago Mercantile Exchange. We use the historical record of futures prices to construct dynamic arbitrage-free models for the SOFR term structure. We find that a Gaussian arbitrage-free Nelson–Siegel model describes term structure well without accounting for jumps and seasonal effects observed in SOFR. However, a shadow-rate extension is needed to describe volatility near the zero-boundary impacting the futures convexity adjustment and option pricing.
Original language | English |
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Journal | Journal of Futures Markets |
Volume | 41 |
Issue number | 10 |
Pages (from-to) | 1520-1544 |
Number of pages | 25 |
ISSN | 0270-7314 |
DOIs | |
Publication status | Published - 2021 |
Bibliographical note
Publisher Copyright:
© 2021 Wiley Periodicals LLC
- arbitrage-free Nelson–Siegel, futures, LIBOR, SOFR, term structure models
Research areas
Links
- https://arxiv.org/pdf/2103.11180.pdf
Submitted manuscript
ID: 306674555