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LIBOR: origins, economics, crisis, scandal, and reform

Author

Listed:
  • David Hou
  • David R. Skeie

Abstract

The London Interbank Offered Rate (LIBOR) is a widely used indicator of funding conditions in the interbank market. As of 2013, LIBOR underpins more than $300 trillion of financial contracts, including swaps and futures, in addition to trillions more in variable-rate mortgage and student loans. LIBOR's volatile behavior during the financial crisis provoked questions surrounding its credibility. Ongoing regulatory investigations have uncovered misconduct by a number of financial institutions. Policymakers across the globe now face the task of reforming LIBOR in the aftermath of the scandal and crisis.

Suggested Citation

  • David Hou & David R. Skeie, 2014. "LIBOR: origins, economics, crisis, scandal, and reform," Staff Reports 667, Federal Reserve Bank of New York.
  • Handle: RePEc:fip:fednsr:667
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    References listed on IDEAS

    as
    1. Acharya, Viral V. & Skeie, David, 2011. "A model of liquidity hoarding and term premia in inter-bank markets," Journal of Monetary Economics, Elsevier, vol. 58(5), pages 436-447.
    2. Darrell Duffie & David R. Skeie & James Vickery, 2013. "A sampling-window approach to transactions-based Libor fixing," Staff Reports 596, Federal Reserve Bank of New York.
    3. François-Louis Michaud & Christian Upper, 2008. "What drives interbank rates? Evidence from the Libor panel," BIS Quarterly Review, Bank for International Settlements, March.
    4. John Taylor & John Williams, 2008. "Further Results on a Black Swan in the Money Market," Discussion Papers 07-046, Stanford Institute for Economic Policy Research.
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    Blog mentions

    As found by EconAcademics.org, the blog aggregator for Economics research:
    1. Eclipsing LIBOR
      by Steve Cecchetti and Kim Schoenholtz in Money, Banking and Financial Markets on 2017-09-04 17:29:38

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    Cited by:

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    2. Mikhail V. Oet & John M. Dooley & Stephen J. Ong, 2015. "The Financial Stress Index: Identification of Systemic Risk Conditions," Risks, MDPI, Open Access Journal, vol. 3(3), pages 1-25, September.
    3. Thomas B. King & Kurt F. Lewis, 2020. "Credit Risk, Liquidity, and Lies," International Journal of Central Banking, International Journal of Central Banking, vol. 16(5), pages 219-267, October.
    4. Bariviera, Aurelio F. & Guercio, M. Belén & Martinez, Lisana B. & Rosso, Osvaldo A., 2016. "Libor at crossroads: Stochastic switching detection using information theory quantifiers," Chaos, Solitons & Fractals, Elsevier, vol. 88(C), pages 172-182.
    5. Mayu Kikuchi & Alfred Wong & Jiayue Zhang, 2019. "Risk of window dressing: quarter-end spikes in the Japanese yen Libor-OIS spread," Journal of Regulatory Economics, Springer, vol. 56(2), pages 149-166, December.
    6. Andrzej Cwynar & Wiktor Cwynar & Monika Baryła-Matejczuk & Moises Betancort, 2019. "Sustainable Debt Behaviour and Well-Being of Young Adults: The Role of Parental Financial Socialisation Process," Sustainability, MDPI, Open Access Journal, vol. 11(24), pages 1-26, December.
    7. Jonathan A. Batten & Igor Lončarski & Peter G. Szilagyi, 2018. "When Kamay Met Hill: Organisational Ethics in Practice," Journal of Business Ethics, Springer, vol. 147(4), pages 779-792, February.
    8. Aryal, Gaurab & Gabrielli, Maria F., 2012. "Is Collusion Proof Auction Expensive? Estimates from Highway Procurements," MPRA Paper 57353, University Library of Munich, Germany, revised 19 Feb 2014.
    9. Kleinow, Jacob & Moreira, Fernando, 2016. "Systemic risk among European banks: A copula approach," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 42(C), pages 27-42.
    10. Darrell Duffie & Jeremy C. Stein, 2015. "Reforming LIBOR and Other Financial Market Benchmarks," Journal of Economic Perspectives, American Economic Association, vol. 29(2), pages 191-212, Spring.
    11. Piotr Mielus, 2016. "Dylematy reformy indeksów rynku finansowego," Gospodarka Narodowa. The Polish Journal of Economics, Warsaw School of Economics, issue 4, pages 91-114.
    12. Alfred Wong & Jiayue Zhang, 2018. "Breakdown of covered interest parity: mystery or myth?," BIS Papers chapters, in: Bank for International Settlements (ed.), The price, real and financial effects of exchange rates, volume 96, pages 57-78, Bank for International Settlements.
    13. Eross, Andrea & Urquhart, Andrew & Wolfe, Simon, 2016. "Liquidity risk contagion in the interbank market," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 45(C), pages 142-155.
    14. Elizabeth C. Klee & Zeynep Senyuz & Emre Yoldas, 2016. "Effects of Changing Monetary and Regulatory Policy on Overnight Money Markets," Finance and Economics Discussion Series 2016-084, Board of Governors of the Federal Reserve System (U.S.).
    15. Alfred Wong & David Leung & Calvin Ng, 2016. "Risk-adjusted Covered Interest Parity: Theory and Evidence," Working Papers 162016, Hong Kong Institute for Monetary Research.
    16. Yoldas, Emre & Senyuz, Zeynep, 2018. "Financial stress and equilibrium dynamics in term interbank funding markets," Journal of Financial Stability, Elsevier, vol. 34(C), pages 136-149.
    17. Thomas B. King & Kurt F. Lewis, 2014. "What Drives Bank Funding Spreads?," Working Paper Series WP-2014-23, Federal Reserve Bank of Chicago.
    18. Ren'e Aid & Giorgia Callegaro & Luciano Campi, 2019. "No-Arbitrage Commodity Option Pricing with Market Manipulation," Papers 1909.07896, arXiv.org, revised Mar 2020.
    19. Darrell Duffie & Piotr Dworczak, 2014. "Robust Benchmark Design," NBER Working Papers 20540, National Bureau of Economic Research, Inc.
    20. Alfred Wong & David Leung & Calvin Ng, 2016. "How do housing purchase limits affect firm default risks in Mainland China?," Working Papers 172016, Hong Kong Institute for Monetary Research.
    21. Aurelio F. Bariviera & M. Belen Guercio & Lisana B. Martinez & Osvaldo A. Rosso, 2015. "A permutation Information Theory tour through different interest rate maturities: the Libor case," Papers 1509.00217, arXiv.org.

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    More about this item

    Keywords

    LIBOR; financial crisis; scandal; interbank; banking; reference rate; interest rate;
    All these keywords.

    JEL classification:

    • G01 - Financial Economics - - General - - - Financial Crises
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation

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