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Could transaction-based financial benchmarks be susceptible to collusive behaviour?

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  • Lilian Muchimba

    (University of Portsmouth)

Abstract

Prior to the series of manipulation scandals, financial benchmarks were perceived as a competitive and objective reflection of underlying money markets (Stenfors and Lindo 2018). For example, the manipulation of the London Interbank Offered Rate (LIBOR), underpinning financial contracts worth trillions of dollars was unthinkable. To prevent manipulation, financial market regulators around the world have recommended a paradigm shift from estimation-based to transaction-based financial benchmarks. This shift is based on the mainstream economic view that financial benchmarks anchored on actual transactions are not susceptible to anticompetitive behaviour. However, unlike auction markets, underlying interbank money markets have unique features. As most activity takes place over-the-counter, they are opaque and are governed by conventions, trust and reciprocity. This complicates the achievement of competitive pricing. Using a novel dataset from Bank of Zambia, this paper makes an empirical investigation into transaction-based benchmarks’ susceptibility to anticompetitive behaviour. Additionally, it contributes to the theoretical understanding of transaction-based financial market benchmarks. The study reflects on financial market regulators’ recommendation to transit from estimation-based to transaction-based financial market benchmarks. Further, the study is of interest to central bankers, as short-term interbank rates are the first stage of the monetary transmission mechanism.

Suggested Citation

  • Lilian Muchimba, 2021. "Could transaction-based financial benchmarks be susceptible to collusive behaviour?," Working Papers in Economics & Finance 2021-11, University of Portsmouth, Portsmouth Business School, Economics and Finance Subject Group.
  • Handle: RePEc:pbs:ecofin:2021-11
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    File URL: http://repec.port.ac.uk/EconFinance/PBSEconFin_2021_11.pdf
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    References listed on IDEAS

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    1. Thorstein Veblen, 1899. "Mr. Cummings's Strictures on "The Theory of the Leisure Class"," Journal of Political Economy, University of Chicago Press, vol. 8, pages 106-106.
    2. Lilian Muchimba & Alexis Stenfors, 2021. "Beyond LIBOR: Money Markets and the Illusion of Representativeness," Journal of Economic Issues, Taylor & Francis Journals, vol. 55(2), pages 565-573, April.
    3. Andreas Schrimpf & Vladyslav Sushko, 2019. "Beyond LIBOR: a primer on the new benchmark rates," BIS Quarterly Review, Bank for International Settlements, March.
    4. David Giles, 2007. "Benford's law and naturally occurring prices in certain ebaY auctions," Applied Economics Letters, Taylor & Francis Journals, vol. 14(3), pages 157-161.
    5. Veblen, Thorstein, 1899. "The Theory of the Leisure Class," History of Economic Thought Books, McMaster University Archive for the History of Economic Thought, number veblen1899.
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    7. 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.
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    More about this item

    Keywords

    Bank of Zambia; banks; collusion; LIBOR; monetary transmission mechanism; reference rates;
    All these keywords.

    JEL classification:

    • B52 - Schools of Economic Thought and Methodology - - Current Heterodox Approaches - - - Historical; Institutional; Evolutionary; Modern Monetary Theory;
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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