Term rates, multicurve term structures and overnight rate benchmarks: A roll–over risk approach

In the current LIBOR transition to overnight–rate benchmarks, it is important understand theoretically and empirically what distinguishes actual term rates from overnight benchmarks or 'synthetic' based on such benchmarks. The well–known 'multi–curve' phenomenon of tenor basis spreads between structures associated with different payment frequencies provides key information this distinction. This can be extracted using a modelling framework concept 'roll–over risk', i.e., risk borrower faces not being able refinance loan at (or known spread to) market benchmark rate. Separating roll–over priced by into credit–downgrade funding–liquidity component, theoretical empirical evidence show that proper new remain elusive multi–curve environment will persist even for secured repurchase agreements.