Work

The SOFR discount

Year: 2024

Type: article

Abstract: The transition from London Interbank Offered Rate (LIBOR) to Secured Overnight Financing Rate (SOFR) affects the reference rate of floating-rate debt worth trillions of dollars. We provide the first evidence highlighting a benefit of the benchmark transition for debt markets. Focusing on the market for dollar-denominated floating rate notes (FRNs), we compare the yield spreads of FRNs linked to LIBOR and SOFR, issued by the same entity during the same month. After adjusting for the maturity-matched spreads from derivatives markets, we find significantly lower spreads for SOFR-linked FRNs. We link this SOFR discount to the enhanced price stability of SOFR-linked FRNs.

Source: Journal of Financial Economics

DOI: 10.1016/j.jfineco.2024.103989

Authors: Sven Klingler, Olav Syrstad

Institution: BI Norwegian Business School

Language: English

Topic: Credit Risk and Financial Regulations

Subfield: Finance

Field: Economics, Econometrics and Finance

Domain: Social Sciences

Open Access status: hybrid

Estimated APC paid: $4,250

Funder: European Research Council