Are Interest Rate Fixings Fixed? An Analysis of Libor and Euribor
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The London Interbank Oﬀered Rate (Libor) and the Euro Interbank Oﬀered Rate (Euribor) are two key market benchmark interest rates used in a plethora of ﬁnancial contracts with notional amounts running into the hundreds of trillions of dollars. The integrity of the rate-setting process for these benchmarks has been under intense scrutiny ever since the ﬁrst reports of attempts to manipulate these rates surfaced in 2007. In this paper, we analyze Libor and Euribor rate submissions by the individual panel banks and shed light on the underlying manipulation incentives by quantifying their potential eﬀects on the ﬁnal rate set (the “ﬁxing”).
Furthermore, we explicitly take into account the possibility of collusion between several market participants. Our setup allows us to quantify such eﬀects for the actual rate-setting process that is in place at present, and compare it to several alternative rate-setting procedures. We ﬁnd that such alternative rate ﬁxings, and larger sample sizes, could signiﬁcantly reduce the eﬀect of manipulation. Furthermore, we discuss the role of the particular questions asked of the panel banks, which are diﬀerent for Libor and Euribor, and examine the need for a transaction database to validate individual submissions.
–Alexander Eisl, Rainer Jankowitschy, WU (Vienna University of Economics and Business); Marti G. Subrahmanyamz, New York University, Stern School of Business