The promises and pitfalls of the secured overnight financing rate

Jungkyu Ahn; Yongkil Ahn

doi:10.1080/13504851.2024.2302896

The promises and pitfalls of the secured overnight financing rate

Jungkyu Ahn
, Yongkil Ahn^*

^*Corresponding author for this work

Department of Business Administration

Monash University
Seoul National University of Science and Technology (SNUST)

Research output: Contribution to journal › Journal article › peer-review

1 Scopus citations

Abstract

The Secured Overnight Financing Rate (SOFR) significantly diverges from Treasury Bill rate when the financial market is under stress. We document that this divergence is significantly manifested in the basis swaps market and that the SOFR’s abrupt downward deviations are associated with increases in the VIX index. Hence, we doubt whether the SOFR is resilient enough as a reference rate for fixed-income instruments when the financial market is in a state of turmoil.

Original language	English
Pages (from-to)	1283-1287
Number of pages	5
Journal	Applied Economics Letters
Volume	32
Issue number	9
DOIs	https://doi.org/10.1080/13504851.2024.2302896
State	Published - 2025

Keywords

basis swap
collateral demand
market stress
SOFR

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10.1080/13504851.2024.2302896

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title = "The promises and pitfalls of the secured overnight financing rate",

abstract = "The Secured Overnight Financing Rate (SOFR) significantly diverges from Treasury Bill rate when the financial market is under stress. We document that this divergence is significantly manifested in the basis swaps market and that the SOFR{\textquoteright}s abrupt downward deviations are associated with increases in the VIX index. Hence, we doubt whether the SOFR is resilient enough as a reference rate for fixed-income instruments when the financial market is in a state of turmoil.",

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AB - The Secured Overnight Financing Rate (SOFR) significantly diverges from Treasury Bill rate when the financial market is under stress. We document that this divergence is significantly manifested in the basis swaps market and that the SOFR’s abrupt downward deviations are associated with increases in the VIX index. Hence, we doubt whether the SOFR is resilient enough as a reference rate for fixed-income instruments when the financial market is in a state of turmoil.

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KW - collateral demand

KW - market stress

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The promises and pitfalls of the secured overnight financing rate

Abstract

Keywords

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