LIBOR: The end of an error

Sammanfattning: LIBOR has been the dominant benchmark rate in the American market for pricing financial instruments. In 2012, the manipulation of LIBOR rates was uncovered, necessitating a change. SOFR was introduced as an alternative reference rate to replace LIBOR as the standard for pricing financial instruments. SOFR has been introduced as a more robust rate less susceptible to manipulation due to its sole reliance on transaction data, contrasting with LIBOR, which relies on bids from banks regarding the rates at which they can currently fund themselves. Empirical analyses have been conducted to measure the difference in volatility between LIBOR and SOFR and to compare the rates' responsiveness to market events. This research aims to draw conclusions about how these two benchmark rates are perceived by the market. Higher volatility may indicate greater risk for investors but can also signify the extent to which rates respond to current market events. Greater responsiveness can suggest that a rate is measuring a more active market. Tests have been carried out using an F-test for equal variances and event studies to examine how the rates react to macroeconomic factors, such as Federal Reserve rate announcements, inflation estimates, and GDP forecasts. Through the empirical analysis and a review of previous research, this paper finds that LIBOR exhibits higher volatility in its 3-month rate, while SOFR displays higher volatility in its overnight rate. Furthermore, SOFR demonstrates greater responsiveness to listed market events compared to LIBOR, indicating that it measures a more dynamic market.