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> Like the fed funds rate [2], it's only quoted for one tenor: overnight. That's not quite true -- for example, 3m OIS swaps have fixings that are essentially
by smallnamespace 9y ago
> Like the fed funds rate [2], it's only quoted for one tenor: overnight.
That's not quite true -- for example, 3m OIS swaps have fixings that are essentially the 3m average of FF over the period in question.
In fact, this is mathematically a bit cleaner. If you construct an interest yield curve off of compounded 1m LIBOR vs. 3M LIBOR, you get rather different answers, whereas OIS yield curves constructed from different tenors are much closer.
The argument for using OIS instead of Treasury yields is pretty simple: Treasuries reflect the cost of borrowing for the government and are implicitly affected by the government's creditworthiness (e.g. not raising the debt ceiling), while banks can actually borrow from the Fed at FF. While the US gov't funds at pretty close to 'risk free', in other markets the credit component would be significant.
OIS is generally closer to LIBOR than a Treasury yield curve is.
- JumpCrisscross 9y ago> this is mathematically a bit cleaner But also misleading. Bootstrapping requires making assumptions about term structure [1]. > OIS is generally closer to LIBOR than a Treasury yield curve is After the crisis the Libor-OIS spread was observed as an indicator of bank instability. They're close, but not the same. When they diverge, it's for reasons incredibly important to certain users of Libor. You're correct in the OIS rate being better than the Treasuries for estimating banks' borrowing costs. [1] http://www.investopedia.com/terms/t/termstructure.asp http://www.investopedia.com/terms/t/termstructure.asp
- pvitz 9y agoI would suggest [1] instead of Investopedia for a modern treatment of yield curve bootstrapping. The only difficulty with OIS is in my opinion the low liquidity for higher maturities where basis swaps have to be used to estimate a spread to LIBOR IRS. [1] https://papers.ssrn.com/sol3/Papers.cfm?abstract_id=2219548 https://papers.ssrn.com/sol3/Papers.cfm?abstract_id=2219548
- clappski 9y agoAs an aside, as someone that works in this space (yield curve construction, pricing, risking etc), does anyone know of a forum where news items have this sort of discussion?