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The LIBOR mechanism and Related Games


  • Diehl, Christoph

    (Center for Mathematical Economics, Bielefeld University)


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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  • Diehl, Christoph, 2014. "The LIBOR mechanism and Related Games," Center for Mathematical Economics Working Papers 482, Center for Mathematical Economics, Bielefeld University.
  • Handle: RePEc:bie:wpaper:482

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    References listed on IDEAS

    1. Rosa Abrantes-Metz & Sofia Villas-Boas & George Judge, 2011. "Tracking the Libor rate," Applied Economics Letters, Taylor & Francis Journals, vol. 18(10), pages 893-899.
    2. Buiter, Willem H., 2008. "Central banks and financial crises," Proceedings - Economic Policy Symposium - Jackson Hole, Federal Reserve Bank of Kansas City, pages 495-633.
    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.
    4. Groves, Theodore, 1973. "Incentives in Teams," Econometrica, Econometric Society, vol. 41(4), pages 617-631, July.
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    Cited by:

    1. Nuria Boot & Timo Klein & Maarten Pieter Schinkel, 2017. "Collusive Benchmark Rates Fixing," Discussion Papers of DIW Berlin 1715, DIW Berlin, German Institute for Economic Research.
    2. Fliszár, Vilmos, 2015. "Csökkenthető-e a referencia-kamatlábak manipulálásának valószínűsége?. Lehetséges irányok egy egyszerűsített modell alapján
      [Can reference interest-rate manipulation be decreased?. Possible directi
      ," Közgazdasági Szemle (Economic Review - monthly of the Hungarian Academy of Sciences), Közgazdasági Szemle Alapítvány (Economic Review Foundation), vol. 0(11), pages 1158-1171.
    3. Nuria Boot & Timo Klein & Maarten Pieter Schinkel, 2017. "Collusive Benchmark Rates Fixing," Tinbergen Institute Discussion Papers 17-122/VII, Tinbergen Institute, revised 26 Jan 2018.

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