PT  - JOURNAL ARTICLE
AU  - Vincenzo Russo
AU  - Frank J. Fabozzi
TI  - The Transition from Interbank Offered Rates to Risk-Free Rates: Evolution in Pricing Models for Interest Rate Derivatives
AID  - 10.3905/jfi.2023.1.153
DP  - 2023 Jan 04
TA  - The Journal of Fixed Income
PG  - jfi.2023.1.153
4099  - https://pm-research.com/content/early/2023/01/04/jfi.2023.1.153.short
4100  - https://pm-research.com/content/early/2023/01/04/jfi.2023.1.153.full
AB  - In this article, we review the transition from interbank offered rates (IBORs) to the new risk-free rates (RFRs) introduced as a result of the process for determining IBOR being discontinued. Focusing on the quantitative aspects of the transition, we describe the differences between the forward-looking rates used under the IBOR environment (both single- and dual-curve IBOR environments) and the backward-looking rates used under the RFR one. Furthermore, we analyze the pricing models for interest rate derivatives across such different frameworks: the single-curve IBOR rates environment (in force before the 2007–2009 credit crisis), the dual-curve IBOR rates environment (in force after the 2007–2009 credit crisis), and the new RFR environment (officially introduced starting January 1, 2022). In particular, we describe the evolution of pricing models for the most relevant plain-vanilla interest-rate derivatives: interest rate swaps, overnight indexed swaps, caplets/floorlets, and swaptions.