Transition from GBP LIBOR to SONIA: Correlation and Volatility Analysis
|Author:||Bc. Matěj Sainer|
|Year:||2023 - winter|
|Leaders:|| PhDr. František Čech Ph.D.
|Work type:|| Bachelors
|Awards and prizes:|
|Abstract:||Following the discovery of one of the most extensive market manipulations
in modern history, the London Interbank Offered Rate (LIBOR) has been terminated, and various newly established risk-free rates have been appointed
as replacements. This thesis aspires to join the topical discussion about the
LIBOR reform by studying the British Pound Sterling (GBP) LIBOR and Sterling
Overnight Index Average (SONIA) relationship, with a focus on their correlation
and volatility. This relationship is mainly studied by analysing the log returns
of both rates via the Generalised Autoregressive Conditional Heteroscedasticity (GARCH) and the Dynamic Conditional Correlation (DCC) GARCH models.
The analysis concentrates on the daily frequency and studies the overlap period
from April 23, 2018, to December 31, 2021. I have discovered significant differences in the volatility of individual rates and found an insignificant positive
correlation between them. The SONIA seems less volatile and generally more
precise while absorbing the market shocks.