Transition from GBP LIBOR to SONIA: Correlation and Volatility Analysis
| Název práce v češtině: | Přechod z GBP LIBOR na SONIA: Analýza korelace a volatility |
|---|---|
| Název v anglickém jazyce: | Transition from GBP LIBOR to SONIA: Correlation and Volatility Analysis |
| Klíčová slova: | LIBOR, SONIA, Korelace, Volatilita,GARCH, Bezrizikové sazby, Mezibankovní trh |
| Klíčová slova anglicky: | LIBOR, SONIA, Correlation, Volatility, Risk-free rates, Interbank market |
| Akademický rok vypsání: | 2021/2022 |
| Typ práce: | bakalářská práce |
| Jazyk práce: | angličtina |
| Ústav: | Institut ekonomických studií (23-IES) |
| Vedoucí / školitel: | PhDr. František Čech, Ph.D. |
| Řešitel: | skrytý - zadáno vedoucím/školitelem |
| Datum přihlášení: | 30.08.2022 |
| Datum zadání: | 30.08.2022 |
| Datum a čas obhajoby: | 25.01.2023 09:00 |
| Místo konání obhajoby: | Opletalova - Opletalova 26, O109, AULA Michala Mejstříka č. 109 |
| Datum odevzdání elektronické podoby: | 03.01.2023 |
| Datum proběhlé obhajoby: | 25.01.2023 |
| Oponenti: | Mgr. Josef Kurka |
| Seznam odborné literatury |
| Brooks, Chris. Introductory Econometrics for Finance. Third edition, Cambridge University Press, 2014.
Click, Christopher. “Death of a Benchmark: The Fall of LIBOR and the Rise of Alternative Rates in the United Kingdom and United States.” North Carolina Banking Institute, vol. 22, no. 1, Mar. 2018, pp. 282–307. Coulter, B., et al. “A Mechanism for LIBOR.” Review of Finance, vol. 22, no. 2, 2017, pp. 491–520. Craig, Ben, and Yiming Ma. “Intermediation in the Interbank Lending Market.” Journal of Financial Economics, vol. 145, no. 2, Part A, Aug. 2022, pp. 179–207. Duffie, Darrell, and Jeremy C. Stein. “Reforming LIBOR and Other Financial Market Benchmarks.” Journal of Economic Perspectives, vol. 29, no. 2, May 2015, pp. 191–212. Financial Stability Board. Interest Rate Benchmark Reform: Overnight Risk-Free Rates and Term Rates. 2 June 2021. Hou, David, and David R. Skeie. LIBOR: Origins, Economics, Crisis, Scandal, and Reform. 2423387, 1 Mar. 2014. Kansal, Sunil, and Ganesh S. Melatur. IBOR Transition – A More In-Depth Look. 3585460, 15 Apr. 2020. Klingler, Sven, and Olav Syrstad. “Life after LIBOR.” Journal of Financial Economics, vol. 141, no. 2, Aug. 2021, pp. 783–801. Muchimba, Lilian, and Alexis Stenfors. Beyond LIBOR: Money Markets and the Illusion of Representativeness. 3759651, 6 Nov. 2020. Refinitiv. Term SONIA Reference Rates. 13 Aug. 2021. Rochet, Jean-Charles, and Jean Tirole. “Interbank Lending and Systemic Risk.” Journal of Money, Credit and Banking, vol. 28, no. 4, 1996, pp. 733–762. Williamson, John. Reference Rates and the International Monetary System. P. G. Peterson Institute for International Economics, 2007. |
| Předběžná náplň práce v anglickém jazyce |
| Research question and motivation
Following the discovery of significant market manipulation in 2012, the worldwide interbank market became a place of many changes. Regulators across the globe started reforming one of the most important benchmarks that underpinned more than 350 trillion USD worth of derivates so that they could prevent this from ever happening again. (Financial Stability Board 2021) As a result of this effort, the regulators created new official substitutes for each rate – risk-free rates – which they have imposed and now maintain to minimise the risk of manipulation. The crucial difference lies in the calculation method. While the value of LIBOR used to be based on in-house estimates, risk-free rates rely on agreed contracts. For instance, the data for SONIA are obtained from the central limit order books of two dealer-to-dealer multilateral trading facilities, such as TP ICAP iSwap and Tradition Trad-X. (Refinitiv 2021) The high topicality of this subject causes it has not been thoroughly researched yet, meaning there are many unanswered questions. Current research suggests that SONIA mitigates the risk of manipulation and could therefore serve as a better benchmark from a regulatory perspective. (Click 2018). However, there is a lack of research on the practical implications of this transition. One of the most recent papers tested three hypotheses linked to the relationships between the new benchmarks (SOFR, ESTR, SONIA) and monetary policy. The paper discovered that the new rates are more robust, and - in general - tend to be less volatile. (Klingler and Syrstad 2021) This paper intends to study the relationship – mainly correlation – between SONIA (risk-free interbank reference rate for GBP) and LIBOR GBP. The main question is if the correlation between the proposed two benchmarks increases over time, assuming the volume of derivatives/contracts linked to SONIA increases. Second, the paper should outline the practical implications of the findings, i.e., what kind of impact it has on banking institutions and other market participants. I hypothesise that the level of correlation increases over time however, the correlation will not be perfect. If this holds, it shows that SONIA could serve as a good substitute for LIBOR because it carries the same dynamics. My additional hypothesis is that the overall value of the benchmark will be systematically higher, which implies higher costs/yields for market participants. Contribution Implementing the process of new alternative rates is still ongoing, and therefore there are many unknowns in this field. Due to the new regulatory framework, there are several practical problems this change brings. Possibly the most significant one is the problematics of fallback rates. Many ongoing valid contracts still rely on LIBOR without any fallback rates and must be changed. The results of the correlation analysis could be beneficial for further research that can – for example – project how significant these changes can be in a more exact way. Subsequently, what sort of impact do they have on the value of relevant contracts/derivatives or trading strategies in general? It can also serve as additional proof that SONIA is a suitable alternative not just from the regulatory perspective but also from the practical one. Methodology All the necessary data are publicly available at the respective benchmark's administrator website, the Bank of England and the Intercontinental Exchange, Inc. However, for practical reasons, I will use the Bloomberg Terminal as the primary source of my data. I intend to analyse one or more tenors using their time series data. Additionally, I will try to obtain transaction data from the trading books to prove my assumption of the rising volumes of the linked contracts/derivatives. The observed period will be 2018 - 2021 (the overlap period). I will observe the dynamics of the correlation through the DCC-GARCH. I will also use the Test of Association/Correlation Between Paired Samples. To study volatility, I will use the GARCH model to obtain fitted values and then I will find a suitable test to compare their distributions. Those should be most fitting tools for time series data of this kind and should provide us with the most accurate answers. Outline Abstract Introduction - motivation outline - a brief overview of existing knowledge - how I add to existing research - an overview of the thesis structure Literature review and hypotheses - literature on the interbank market and its principles - analysis of the LIBOR GBP and SONIA (calculation, characteristics) - what hypotheses will be tested - motivation why is it reasonable to test them (why there should be a relationship) Methodology - relevant description of data - validity checks of underlying assumptions - correlation analysis methodology Results - rejecting / not rejecting hypotheses - summary of the findings and evaluation Conclusion |