FORECASTING PERFORMANCE OF THOR FORWARD RATES FOR THOR AVERAGES

  • Anya Khanthavit Thammasat University
Keywords: IRS, LIBOR, term rates

Abstract

Since July 1, 2021, Thai financial institutions have stopped issuing financial products linked to the Thai baht interest rate fixing (THBFIX). The Thai overnight repurchase rate (THOR) now serves as a substitute. However, the settlement of THOR-linked products refers to the average daily THOR (THOR average) computed in arrears. THOR averages are backward-looking, random, and unknown to the present market. By adopting THOR, interest rate swaps become overnight index swaps (OIS). THOR forward rates are fixed for the expected THOR averages, to calculate cash flows in the floating rate leg, in the modified model for the valuation of THOR OIS contracts. The success of the modified model depends critically on the equality of the THOR forward rates and expected THOR averages. This study tests the implications of the equality condition—informativeness, unbiasedness, and forecast accuracy. The data were captured daily over a sample period from June 22, 2020, to September 23, 2021. THOR forward rates are not informative or unbiased. However, the competing government has implied that forward rates and lagged THOR averages perform equally poorly. In terms of forecast accuracy, the THOR forward rates perform significantly better. Therefore, THOR forward rates are recommended over competing rates for the valuation of THOR OIS contracts.

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Published
2022-02-15
How to Cite
Khanthavit, A. (2022). FORECASTING PERFORMANCE OF THOR FORWARD RATES FOR THOR AVERAGES. Social Science Asia, 8(1), 46-59. Retrieved from https://socialscienceasia.nrct.go.th/index.php/SSAsia/article/view/278
Section
Research Article