TERM RATES, MULTICURVE TERM STRUCTURES AND OVERNIGHT RATE BENCHMARKS

TERM RATES, MULTICURVE TERM STRUCTURES AND OVERNIGHT RATE BENCHMARKS: A ROLL–OVER RISK APPROACH

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TERM RATES, MULTICURVE TERM STRUCTURES AND OVERNIGHT RATE BENCHMARKS : A ROLL–OVER RISK APPROACH. / Backwell, Alex; Macrina, Andrea; Schlögl, Erik; Skovmand, David.

I: Frontiers of Mathematical Finance, Bind 2, Nr. 3, 2023, s. 340-384.

Publikation: Bidrag til tidsskrift › Tidsskriftartikel › Forskning › fagfællebedømt

Harvard

Backwell, A, Macrina, A, Schlögl, E & Skovmand, D 2023, 'TERM RATES, MULTICURVE TERM STRUCTURES AND OVERNIGHT RATE BENCHMARKS: A ROLL–OVER RISK APPROACH', Frontiers of Mathematical Finance, bind 2, nr. 3, s. 340-384. https://doi.org/10.3934/fmf.2023009

APA

Backwell, A., Macrina, A., Schlögl, E., & Skovmand, D. (2023). TERM RATES, MULTICURVE TERM STRUCTURES AND OVERNIGHT RATE BENCHMARKS: A ROLL–OVER RISK APPROACH. Frontiers of Mathematical Finance, 2(3), 340-384. https://doi.org/10.3934/fmf.2023009

Vancouver

Backwell A, Macrina A, Schlögl E, Skovmand D. TERM RATES, MULTICURVE TERM STRUCTURES AND OVERNIGHT RATE BENCHMARKS: A ROLL–OVER RISK APPROACH. Frontiers of Mathematical Finance. 2023;2(3):340-384. https://doi.org/10.3934/fmf.2023009

Author

Backwell, Alex ; Macrina, Andrea ; Schlögl, Erik ; Skovmand, David. / TERM RATES, MULTICURVE TERM STRUCTURES AND OVERNIGHT RATE BENCHMARKS : A ROLL–OVER RISK APPROACH. I: Frontiers of Mathematical Finance. 2023 ; Bind 2, Nr. 3. s. 340-384.

Bibtex

@article{857439fcad6646f084812cc72dbd5f2b,

title = "TERM RATES, MULTICURVE TERM STRUCTURES AND OVERNIGHT RATE BENCHMARKS: A ROLL–OVER RISK APPROACH",

abstract = "In the current LIBOR transition to overnight–rate benchmarks, it is important to understand theoretically and empirically what distinguishes actual term rates from overnight benchmarks or “synthetic” term rates based on such benchmarks. The well–known “multi–curve” phenomenon of tenor basis spreads between term structures associated with different payment frequencies provides key information on this distinction. This information can be extracted using a modelling framework based on the concept of “roll–over risk”, i.e., the risk a borrower faces of not being able to refinance a loan at (or at a known spread to) a market benchmark rate. Separating the roll–over risk priced by tenor basis spreads into a credit–downgrade and a funding–liquidity component, the theoretical modelling and the empirical evidence show that proper term rates based on the new benchmarks remain elusive and that a multi–curve environment will persist even for rates secured by repurchase agreements.",

keywords = "affine term structure models, basis swaps, calibration and estimation, IBOR, interest rate benchmark reform, LIBOR transition, multi–curve interest rate term structure, OIS, risk–free rates, Roll–over risk",

author = "Alex Backwell and Andrea Macrina and Erik Schl{\"o}gl and David Skovmand",

year = "2023",

doi = "10.3934/fmf.2023009",

language = "English",

volume = "2",

pages = "340--384",

journal = "Frontiers of Mathematical Finance",

issn = "2769-6715",

number = "3",

}

RIS

TY - JOUR

T1 - TERM RATES, MULTICURVE TERM STRUCTURES AND OVERNIGHT RATE BENCHMARKS

T2 - A ROLL–OVER RISK APPROACH

AU - Backwell, Alex

AU - Macrina, Andrea

AU - Schlögl, Erik

AU - Skovmand, David

PY - 2023

Y1 - 2023

N2 - In the current LIBOR transition to overnight–rate benchmarks, it is important to understand theoretically and empirically what distinguishes actual term rates from overnight benchmarks or “synthetic” term rates based on such benchmarks. The well–known “multi–curve” phenomenon of tenor basis spreads between term structures associated with different payment frequencies provides key information on this distinction. This information can be extracted using a modelling framework based on the concept of “roll–over risk”, i.e., the risk a borrower faces of not being able to refinance a loan at (or at a known spread to) a market benchmark rate. Separating the roll–over risk priced by tenor basis spreads into a credit–downgrade and a funding–liquidity component, the theoretical modelling and the empirical evidence show that proper term rates based on the new benchmarks remain elusive and that a multi–curve environment will persist even for rates secured by repurchase agreements.

AB - In the current LIBOR transition to overnight–rate benchmarks, it is important to understand theoretically and empirically what distinguishes actual term rates from overnight benchmarks or “synthetic” term rates based on such benchmarks. The well–known “multi–curve” phenomenon of tenor basis spreads between term structures associated with different payment frequencies provides key information on this distinction. This information can be extracted using a modelling framework based on the concept of “roll–over risk”, i.e., the risk a borrower faces of not being able to refinance a loan at (or at a known spread to) a market benchmark rate. Separating the roll–over risk priced by tenor basis spreads into a credit–downgrade and a funding–liquidity component, the theoretical modelling and the empirical evidence show that proper term rates based on the new benchmarks remain elusive and that a multi–curve environment will persist even for rates secured by repurchase agreements.

KW - affine term structure models

KW - basis swaps

KW - calibration and estimation

KW - IBOR

KW - interest rate benchmark reform

KW - LIBOR transition

KW - multi–curve interest rate term structure

KW - OIS

KW - risk–free rates

KW - Roll–over risk

U2 - 10.3934/fmf.2023009

DO - 10.3934/fmf.2023009

M3 - Journal article

AN - SCOPUS:85153779641

VL - 2

SP - 340

EP - 384

JO - Frontiers of Mathematical Finance

JF - Frontiers of Mathematical Finance

SN - 2769-6715

IS - 3

ER -

ID: 391119151

Institut for Matematiske Fag