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Robust Benchmark Design

Author

Listed:
  • Duffie, Darrell

    (Stanford University)

  • Dworczak, Piotr

    (University of Chicago)

Abstract

Recent scandals over the manipulation of LIBOR, foreign exchange benchmarks, and other financial benchmarks have spurred policy discussions over their appropriate design. We characterize the optimal fixing of a benchmark as an estimator of a market value or reference rate. The fixing data are the reports or transactions of agents whose profits depend on the fixing, and who may therefore have incentives to manipulate it. If the benchmark administrator cannot detect or deter the strategic splitting of trades, we show that the best linear unbiased fixing is the commonly used volume-weighted average price (VWAP).

Suggested Citation

  • Duffie, Darrell & Dworczak, Piotr, 2018. "Robust Benchmark Design," Research Papers 3175, Stanford University, Graduate School of Business.
    • Handle: RePEc:ecl:stabus:3175
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    File URL: https://www.gsb.stanford.edu/gsb-cmis/gsb-cmis-download-auth/376316
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    Citations

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    Cited by:

    1. Victor Olkhov, 2021. "Three Remarks On Asset Pricing," Papers 2105.13903, arXiv.org, revised Jan 2024.
    2. Frei, Christoph & Mitra, Joshua, 2021. "Optimal closing benchmarks," Finance Research Letters, Elsevier, vol. 40(C).
    3. Victor Olkhov, 2023. "Market-Based Probability of Stock Returns," Papers 2302.07935, arXiv.org, revised Feb 2024.
    4. Alex Frankel & Navin Kartik, 2019. "Improving Information from Manipulable Data," Papers 1908.10330, arXiv.org, revised Feb 2021.
    5. Muto, Ichiro, 2017. "The role of the reference rate in an interbank market with imperfect information," Global Finance Journal, Elsevier, vol. 34(C), pages 16-31.
    6. Zhang, Anthony Lee, 2022. "Competition and manipulation in derivative contract markets," Journal of Financial Economics, Elsevier, vol. 144(2), pages 396-413.
    7. Victor Olkhov, 2021. "Theoretical Economics and the Second-Order Economic Theory. What is it?," Papers 2112.04566, arXiv.org, revised Mar 2024.
    8. Aquilina, Matteo & Ibikunle, Gbenga & Mollica, Vito & Steffen, Tom, 2022. "The visible hand: benchmarks, regulation, and liquidity," Journal of Financial Markets, Elsevier, vol. 61(C).
    9. Gong, Aibo & Ke, Shaowei & Qiu, Yawen & Shen, Rui, 2022. "Robust pricing under strategic trading," Journal of Economic Theory, Elsevier, vol. 199(C).

    More about this item

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors

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