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The Effects of the LIBOR Scandal on Volatility and Liquidity in LIBOR Futures Markets

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  • Bachmair, K.

Abstract

In 2008, first suspicions arose that the London Interbank Offered Rate (LIBOR) had been systematically manipulated by financial institutions involved with its fixing; in June 2012, several major international banks officially admitted to this. The regulatory response could not have been stronger: the LIBOR was not just reformed but discontinued altogether. By studying 3-months LIBOR futures, this paper evaluates the consequences four scandal-related events have had on liquidity and volatility in LIBOR markets. The goal is to document the market disruption, or lack thereof, caused by the manipulation and discontinuation and to draw the relevant policy lessons. One finding is that the liquidity outflows necessitated by the discontinuation and the associated volatility increases were confined to a period of a few weeks before the discontinuation, easing potential concerns that market transitions of the scale of LIBOR could only be done at the cost of major and prolonged disruption.

Suggested Citation

  • Bachmair, K., 2023. "The Effects of the LIBOR Scandal on Volatility and Liquidity in LIBOR Futures Markets," Cambridge Working Papers in Economics 2303, Faculty of Economics, University of Cambridge.
    • Handle: RePEc:cam:camdae:2303
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    More about this item

    Keywords

    LIBOR manipulation scandal; market manipulation; LIBOR discontinuation; LIBOR futures; market microstructure; liquidity; volatility; market reform;
    All these keywords.

    JEL classification:

    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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