How were OIS discount curves built before long-term OIS were liquid?

Question

Many sources put the switch from LIBOR discounting to OIS discounting at some point in 2008, or perhaps a little earlier (the earliest I have seen is August 2007). It seems that this may be optimistic, and that the switch did not happen until a couple of years later, some time around 2010.

As far as I can tell, 10Y OIS were not often quoted until mid-2008 (Bloomberg has prices from 6th July) and longer term OIS were not quoted until the end of 2011 (Bloomberg has 15Y+ OIS quotes from 27th Sep 2011).

There is some overlap when the market built OIS discount curves, but long-term OIS swaps were not liquidly traded. What techniques were used to build the discount curve in the absence of OIS quotes?

Answer 1

The ois curves were (and still are) primarily build from adding together (a) interest rate swap rates and (b) Fed Funds/Libor basis swaps. For example, if 10yr swaps are 2.0%, and 10yr fF/libor is -35bp, the 10yr ois is 1.65%.

The basis swaps have been liquid for decades, so this calculation has always been possible. However, participants didn't discount swaps at ois until after 2008, when the FF/Libor basis widened dramatically.