Shedding light on the dynamics of the secured overnight financing rate (SOFR)

Lior David-Pur, Koresh Galil, Mosi Rosenboim, Offer Moshe Shapir

Research output: Contribution to journalArticlepeer-review

Abstract

Investigating the transition from the London interbank offered rate (LIBOR) to the secured overnight financing rate (SOFR) and considering the documented volatility of SOFR, this study examines the dynamic nature and potential drivers of the SOFR by analyzing both the SOFR–EFFR (effective Federal Funds rate) and SOFR–IOER (interest on excess reserves) spreads. The results reveal noteworthy correlations between the SOFR and end-of-month anomalies and Federal Reserve market interventions in the repo market. These effects persist even after controlling for other variables, such as the amount of outstanding Treasury securities, Treasury General Account balance, and net repo transactions by primary dealers. Investors in SOFR-linked instruments should be mindful of the possible impact of these factors.

Original languageAmerican English
JournalInternational Review of Finance
DOIs
StateAccepted/In press - 1 Jan 2023

Keywords

  • London Interbank offered rate (LIBOR)
  • effective Federal Funds rate (EFFR)
  • interest on excess reserves (IOER)
  • repurchase agreement (repo)
  • secured overnight financing rate (SOFR)

All Science Journal Classification (ASJC) codes

  • Finance
  • Economics and Econometrics

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