Is SOFR better than LIBOR?

20 Pages Posted: 7 May 2019

See all articles by Urban J. Jermann

Urban J. Jermann

University of Pennsylvania - Finance Department; National Bureau of Economic Research (NBER)

Date Written: April 18, 2019

Abstract

It is expected that in the near future USD LIBOR will be replaced by a rate based on SOFR. Loans indexed to LIBOR offer lenders insurance against funding shocks; SOFR does not have this property. In this paper, I develop a stylized model to study this mechanism and to take a first look at quantitative magnitudes. In my model, under normal conditions, an economy using SOFR behaves similarly to an economy using LIBOR. Under more extreme financial conditions, differences can be nontrivial.

Keywords: LIBOR, floating rates, TED spread

JEL Classification: G21, G29, E32

Suggested Citation

Jermann, Urban J., Is SOFR better than LIBOR? (April 18, 2019). Available at SSRN: https://ssrn.com/abstract=3361942 or http://dx.doi.org/10.2139/ssrn.3361942

Urban J. Jermann (Contact Author)

University of Pennsylvania - Finance Department ( email )

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National Bureau of Economic Research (NBER)

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