RT Journal Article
SR Electronic
T1 The Transition from Interbank Offered Rates to Risk-Free Rates: Evolution in Pricing Models for Interest Rate Derivatives
JF The Journal of Fixed Income
FD Institutional Investor Journals
SP jfi.2023.1.153
DO 10.3905/jfi.2023.1.153
A1 Vincenzo Russo
A1 Frank J. Fabozzi
YR 2023
UL https://pm-research.com/content/early/2023/01/04/jfi.2023.1.153.abstract
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.