The hairy chart: Historical accuracy of LIBOR forward curves
The graphs below plot the past forward curves over the actual path LIBOR followed. They show that the forward curve has been a somewhat accurate predictor over the next six months or so, pricing in more foreseeable market events in the near term. Beyond that, they have not generally been accurate as the market does not predict further and less certain events. This is the reason for the significant delta or “error” in forward rate predictions, particularly exaggerating the error when significant unanticipated events move LIBOR.
The forward curve remains an important base case for underwriting, with most investors adding a variety of scenarios for stress testing.
1-month USD LIBOR vs. historical forward curves
3-month GBP LIBOR vs. historical forward curves
3-month EURIBOR vs. historical forward curves
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