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The LIBOR mechanism and related games

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  • Christoph Diehl

    ()
    (Center for Mathematical Economics, Bielefeld University)

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    Abstract

    The London InterBank Offered Rate (LIBOR) is the most important set of interest rate benchmarks. Recently there have been reports about systematic manipulation of the LIBOR. We thus investigate incentives and possibilities to rig the LIBOR or related statistics for quote submitting panel banks. Both reputation concerns and financial exposure to the index may lead to misrepresentation of borrowing costs. Even in the static model we consider, we show that incorrect quoting is the standard and honesty the exception. In particular, we can theoretically explain why the LIBOR quotes were too low during the financial crisis which started in 2007, when increasing panel bank sizes is helpful and why individual quotes should be published with delay. Moreover, we evaluate and compare the performance of different aggregators like the median, the trimmed average and the average.

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    File URL: http://www.imw.uni-bielefeld.de/n/upload/paper/539fd53b59e3bb12d203f45a912eeaf2.pdf
    File Function: First version, 2013
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    Bibliographic Info

    Paper provided by Bielefeld University, Center for Mathematical Economics in its series Working Papers with number 482.

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    Length: 36 pages
    Date of creation: May 2013
    Date of revision:
    Handle: RePEc:bie:wpaper:482

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    1. Abrantes-Metz, Rosa & Villas-Boas, Sofia B. & Judge, George G., 2013. "Tracking the Libor Rate," Department of Agricultural & Resource Economics, UC Berkeley, Working Paper Series qt2p33x7dk, Department of Agricultural & Resource Economics, UC Berkeley.
      • Abrantes-Metz, Rosa & Villas-Boas, Sofia B. & Judge, George G., 2010. "Tracking the Libor rate," CUDARE Working Paper Series 1108R, University of California at Berkeley, Department of Agricultural and Resource Economics and Policy, revised Jul 2010.
    2. Groves, Theodore, 1973. "Incentives in Teams," Econometrica, Econometric Society, vol. 41(4), pages 617-31, July.
    3. Abrantes-Metz, Rosa M. & Kraten, Michael & Metz, Albert D. & Seow, Gim S., 2012. "Libor manipulation?," Journal of Banking & Finance, Elsevier, vol. 36(1), pages 136-150.
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