As interest rate benchmarks move from LIBOR to overnight Risk-Free Rates (RFR), it has become increasingly important for models to accurately capture the interest rate dynamics at the overnight tenor. Overnight rates closely track central bank policy rate decisions resulting, in highly...

Modelling the risk that a financial institution may not be able to roll over short-term borrowing at the market reference rate, we derive the dynamics of (interbank) reference term rates (e.g., LIBOR) and their spread vis-à-vis benchmarks based on overnight reference rates, e.g., rates implied...