Purpose
Summarize and review the key developments during the first three-quarters of 2021 relating to transition of the London InterBank Offered Rate (LIBOR) to alternative risk-free rates, in ...accordance with the guidance of global regulators and market participants.
Design/methodology/approach
Outlines and explains four key events to date during 2021 that are instrumental to the success of LIBOR transition, including the ISDA 2020 IBOR Protocol and Supplement, the 5 March 2021 announcements by ICE Benchmark Administration and the Financial Conduct Authority, the transition of interdealer swap conventions from LIBOR to SOFR, and the ARRC endorsement of the CME Group SOFR term rate.
Findings
The global adherence to the ISDA Protocol and Supplement, the successful launch of “SOFR First” and other “RFR First” swaps convention transitions, and the ARRC’s endorsement of CME’s SOFR term rate have given the market the clarity and tools that it needs to complete the transition away from LIBOR by the deadlines fixed by the 5 March 2021 benchmark transition event.
Practical implications
It now is clear that market participants globally have the resources to, and must, move to adopt alternative reference rates and related operational systems and other infrastructure to cease origination of new LIBOR-linked contracts after 31 December 2021. The ARRC’s endorsement of the SOFR term rate for business loans and related derivatives and securitizations is a critical positive development for the structured finance market.
Originality/value
Expert analysis and guidance from experienced finance lawyers.
In recent years, interest-rate modeling has developed rapidly in terms of both practice and theory. The academic and practitioners' communities, however, have not always communicated as productively ...as would have been desirable. As a result, their research programs have often developed with little constructive interference. In this book, Riccardo Rebonato draws on his academic and professional experience, straddling both sides of the divide to bring together and build on what theory and trading have to offer.
Rebonato begins by presenting the conceptual foundations for the application of the LIBOR market model to the pricing of interest-rate derivatives. Next he treats in great detail the calibration of this model to market prices, asking how possible and advisable it is to enforce a simultaneous fitting to several market observables. He does so with an eye not only to mathematical feasibility but also to financial justification, while devoting special scrutiny to the implications of market incompleteness.
Much of the book concerns an original extension of the LIBOR market model, devised to account for implied volatility smiles. This is done by introducing a stochastic-volatility, displaced-diffusion version of the model. The emphasis again is on the financial justification and on the computational feasibility of the proposed solution to the smile problem. This book is must reading for quantitative researchers in financial houses, sophisticated practitioners in the derivatives area, and students of finance.
The purpose of the article/hypothesis: The considerations presented in this article aim to focus on the final choice of benchmarks in Japan, which operated the LIBOR rate expressed in Japanese yen. ...In turn, the main purpose of the article is to try to answer whether the newly selected alternative benchmarks in the Tokyo market meet the characteristics of an ideal rate. Methodology: The paper reviews the literature, studies of regulators and index administrators, presenting the stages of reform, the selection of alternative reference rates and making a comparative analysis with the previously functioning LIBOR rate. Due to the subject of the analysis, basic statistical methods were used. Results of the research: The course of benchmark reform in the Japanese market indicates that the reform has been successfully thought out and implemented, and the rates proposed as alternatives are well able to replace the JPY LIBOR rate. However, it should be noted that in this market it was decided that there are three alternatives to choose from covering both interbank rates and risk-free rates. These rates are referred to as: TONA, TIBOR and TORF. Under these circumstances, market participants must consider the optimal choice of comparative options depending on their financial products, the nature of the transactions they are dealing with and their own individual business needs. However, judging whether they are better than the LIBOR rate, the answer is positive because they are based on acts.
Cel artykułu/hipoteza: Osią rozważań prowadzonych w niniejszym artykule jest ostateczny wybór benchmarków przez Japonię, w której funkcjonowała stopa LIBOR wyrażona w jenie japońskim. Natomiast głównym celem artykułu jest próba odpowiedzi czy nowo wybrane alternatywne wskaźniki referencyjne na rynku tokijskim spełniają cechy idealnej stopy. Metodyka: W opracowaniu dokonano przeglądu literatury, opracowań regulatorów i administratorów indeksów, prezentując etapy reformy, wybór alternatywnych stóp referencyjnych oraz dokonując analizy porównawczej z dotychczas funkcjonującą stopą LIBOR. Ze względu na przedmiot prowadzonej analizy skorzystano z podstawowych metod statystycznych. Wyniki/Rezultaty badania: Przebieg reformy benchmarków na rynku japońskim wskazuje, że została ona przemyślana i wdrożona z sukcesem, a stawki zaproponowane jako alternatywy są w stanie dobrze zastąpić stopę LIBOR JPY. Należy jednak odnotować, że na rynku tym zdecydowano się na istnienie trzech alternatywnych opcji do wyboru obejmujące zarówno stawki międzybankowe, jak i stopy wolne od ryzyka. Mowa tu o stopach: TONA, TIBOR i TORF. W tych okolicznościach uczestnicy rynku muszą rozważyć optymalny dobór opcji porównawczych w zależności od posiadanych produktów finansowych, charakteru transakcji, z którymi mają do czynienia oraz własnych indywidualnych potrzeb biznesowych. Oceniając jednak czy są lepsze od stopy LIBOR można powiedzieć, że tak ponieważ są oparte na rzeczywistych transakcjach, więc wydają się być solidniejsze.
Social media disclosure and reputational damage Huan, Xing; Parbonetti, Antonio; Redigolo, Giulia ...
Review of quantitative finance and accounting,
05/2024, Letnik:
62, Številka:
4
Journal Article
Recenzirano
We provide new evidence on the effects of social media in the context of a financial scandal using a sample of banks that were accused of manipulating the London Interbank Offered Rate (LIBOR). We ...find that increased bank Twitter activity when the scandal surfaced has a positive moderating effect on equity returns. However, the dissemination of content operated by social media users has a negative counterbalancing effect, thus amplifying the impact of the scandal. In particular, tweets that are unrelated to the scandal and characterized by positive sentiment contribute to exacerbating the reputational damage suffered by banks. We contribute to the emerging literature on the role of social media in capital markets.
The LIBOR (London Interbank Offered Rate) scandal, which led to the prosecution of both financial institutions and individuals for manipulating the primary interest rate benchmark in global financial ...markets, shows that the current top‐down approaches to regulatory rule enforcement cannot prevent or adequately detect financial market abuse. We argue that a bottom‐up approach, which relies on individuals acting in the interest of the common good, may be more effective in organizational environments that are duty‐ as well as incentive‐based. This approach encourages individuals to accept a degree of moral responsibility for their actions, and to some extent for the actions of others. We argue that properly motivated and instructed individuals can think and act better than they might otherwise do, despite behavioural biases. Nonetheless, there are circumstances under which the prevention of market manipulation may not ultimately serve the common good.
This book provides a compelling account of the rigging of benchmarks during and after the financial crisis of 2007–08. Written in clear language accessible to the non-specialist, it provides the ...historical context necessary for understanding the benchmarks – LIBOR, FOREX and the Gold and Silver Fixes – and shows how and why they have to be reformed in the face of rapid technological changes in markets. Though banks have been fined and a few traders have been jailed, justice will not be done until senior bankers are made responsible for their actions. Provocative and rigorously argued, this book makes concrete recommendations for improving the security of the financial services industry and holding bankers to account.This book provides a compelling account of the rigging of benchmarks during and after the financial crisis of 2007–08. Written in clear language accessible to the non-specialist, it provides the historical context necessary for understanding the benchmarks – LIBOR, FOREX and the Gold and Silver Fixes – and shows how and why they have to be reformed in the face of rapid technological changes in markets. Though banks have been fined and a few traders have been jailed, justice will not be done until senior bankers are made responsible for their actions. Provocative and rigorously argued, this book makes concrete recommendations for improving the security of the financial services industry and holding bankers to account.
We develop a Gaussian stochastic string model that provides exact closed-form expressions for the prices and hedging portfolios of caps and swaptions. Under certain conditions, our pricing ...expressions reduce to Black (1976) formulas. We also propose a stochastic string LIBOR market model that generalizes the models of Brace et al. (1997) and Longstaff et al. (2001a). We provide a possible explanation for some problems involved in the relative valuation of these derivatives. We also attain the observational equivalence of Kerkhof and Pelsser (2002) and prove that, in our setup, the models proposed by Brace et al. (1997) and Longstaff et al. (2001a) are more parsimonious than stated in the original papers.
•We apply the stochastic string modeling to pricing and hedging caps and swaptions.•We obtain closed-form expressions and a multi-factor extension of Jamshidian’s formula.•We develop a stochastic string LIBOR market model.•We propose an explanation for the problem of relative valuation of caps and swaptions.•We obtain relevant observational equivalence results.
The term structure of interbank risk Filipović, Damir; Trolle, Anders B.
Journal of financial economics,
09/2013, Letnik:
109, Številka:
3
Journal Article
Recenzirano
Odprti dostop
We infer a term structure of interbank risk from spreads between rates on interest rate swaps indexed to the London Interbank Offered Rate (LIBOR) and overnight indexed swaps. We develop a tractable ...model of interbank risk to decompose the term structure into default and non-default (liquidity) components. From August 2007 to January 2011, the fraction of total interbank risk due to default risk, on average, increases with maturity. At short maturities, the non-default component is important in the first half of the sample period and is correlated with measures of funding and market liquidity. The model also provides a framework for pricing, hedging, and risk management of interest rate swaps in the presence of significant basis risk.
We use the Lasso linear regression technique to detect level shifts and additive outliers in both the daily 3 and 6 month US dollar LIBOR rates, and compare the results to an identical application of ...this technique to non-LIBOR, US short-term funding benchmarks. We find that the two LIBORs have the largest incidence of outliers, especially, additive outliers. For two non-LIBOR benchmarks, the 6 month Treasury bill and the Federal funds effective rate, no outliers were detected, which reinforces our results. Furthermore, our identified outlier episodes for both LIBOR rates fall inside the period that the manipulation of LIBOR occurred.
•Use the Lasso linear regression technique to detect outliers.•Detection is done for the daily 3 and 6 month US dollar LIBOR rates.•Compare results to application of the technique to non-LIBOR, US short-term rates.•LIBOR rates have the largest incidence of outliers, especially, additive outliers.•Outlier episodes for LIBORs are inside the period manipulation of LIBOR occurred.
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