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On 30 June 2023, the USD London Interbank Offered Rate (LIBOR) panel ceased, and market participants have been transitioning to the Secured Overnight Financing Rate (SOFR) as the alternative benchmark. In their article published in The Journal of Fixed Income titled “How Do Alternatives to LIBOR Measure Up?”, Chair of NERA’s Global Securities and Finance Practice Dr. Faten Sabry, Johns Hopkins University Professor Dr. Frank Fabozzi, and NERA Senior Analyst Ramisa Roya examine the relationship between SOFR and LIBOR and analyze various additional benchmark rates that were considered by regulators, academics, and industry experts.

The authors conduct statistical analysis to evaluate how well the adjusted benchmark rates have tracked one-month LIBOR using historical data. First, they use the mean absolute error to quantify the distance between one-month LIBOR and each benchmark rate, after adjusting for term and spread. Next, they employ a time-series analysis to assess the degree to which each benchmark co-moved with one-month LIBOR. They find that although benchmark rates, including SOFR, have generally tracked one-month LIBOR rates well in the long run, the relationship weakens in times of market dislocation, such as during the 2007–2009 global financial crisis and the 2020 COVID-19 pandemic.