How Do Alternatives to LIBOR Measure Up?

Abstract

The USD LIBOR panel has ceased as of June 30, 2023, and market participants have been transitioning to the Secured Overnight Financing Rate (SOFR) as the alternative benchmark. In this article, we examine the relation between SOFR and LIBOR as well as analyze various additional benchmark rates that were considered by regulators, academics, and industry experts. We conduct statistical analysis to evaluate how well the adjusted benchmark rates have tracked 1-month LIBOR using historical data. First, we use the mean absolute error to quantify the distance between 1-month LIBOR and each benchmark rate, after adjusting for term and spread. Next, we employ a time-series analysis to assess the degree to which each benchmark co-moved with 1-month LIBOR. We find that although benchmark rates, including SOFR, have generally tracked 1-month LIBOR rates well in the long run, the relation weakens in times of market dislocation, such as during the 2007–2009 global financial crisis and the 2020 COVID-19 pandemic.