Dynamic term structure models for SOFR futures
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Dynamic term structure models for SOFR futures. / Skov, Jacob Bjerre; Skovmand, David.
I: Journal of Futures Markets, Bind 41, Nr. 10, 2021, s. 1520-1544.Publikation: Bidrag til tidsskrift › Tidsskriftartikel › Forskning › fagfællebedømt
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TY - JOUR
T1 - Dynamic term structure models for SOFR futures
AU - Skov, Jacob Bjerre
AU - Skovmand, David
N1 - Publisher Copyright: © 2021 Wiley Periodicals LLC
PY - 2021
Y1 - 2021
N2 - 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.
AB - 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.
KW - arbitrage-free Nelson–Siegel
KW - futures
KW - LIBOR
KW - SOFR
KW - term structure models
U2 - 10.1002/fut.22246
DO - 10.1002/fut.22246
M3 - Journal article
AN - SCOPUS:85110152761
VL - 41
SP - 1520
EP - 1544
JO - Journal of Futures Markets
JF - Journal of Futures Markets
SN - 0270-7314
IS - 10
ER -
ID: 306674555