SOFR Term Rates From Treasury Repo Pricing

Lou, Wujiang

doi:10.2139/ssrn.3776832

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Background On Sofr1

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2021

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“…The key difference is that LIBOR is reported across multiple tenors covering unsecured term lending up to 12 months. SOFR, being an overnight rate, by construction has no in‐built view of the future beyond the 24‐h term, and is furthermore secured in the sense that credit risk is mitigated in a repo transaction (see also Lou, 2020 for a discussion of credit risk in SOFR). Furthermore, SOFR has shown itself to be extremely volatile at times.…”

Section: Background On Sofrmentioning

confidence: 99%

Dynamic term structure models for SOFR futures

Skov

Skovmand

2021

Journal of Futures Markets

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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.

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Section: Background On Sofrmentioning

confidence: 99%