Impending LIBOR Cessation and Assessment of Alternative Reference Rates

Abstract

Created in 1969, LIBOR has exponentially grown into the standard benchmark rate used in financial instruments with floating interest rate structures. Within the past decade, the rate has been under a great deal of scrutiny due to various LIBOR manipulation claims. After 2021, LIBOR will be discontinued, and a replacement rate will need to be found for the approximately $200 trillion in financial instruments that currently depend on LIBOR. Recently, governments have proposed replacement rates, called alternative reference rates, to be established for various currencies. This thesis explores (i) if these proposed alternative reference rates are good replacements for LIBOR, (ii) what established rates could be good replacements for LIBOR, and (iii) if there is statistical evidence for LIBOR manipulation in the past. Through various regressions and qualitative analysis, the thesis concludes that alternative reference rates are acceptable replacements for LIBOR. In addition, the thesis reports that existing rates, such as the U.S. Treasury Constant Maturity rate, may also be seen as acceptable alternatives. Lastly, the thesis finds that there is statistical evidence for historical LIBOR manipulation, so there is a need for LIBOR's replacement.