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On the trade-offs in money market benchmarks' stabilisation

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  • Marcin Dec

Abstract

We propose a theoretical stochastic set-up for a panel of contributors to a volume weighted raw money market index, which is the main contribution of this research. 'The hypothetical problems with: changes in the panel's composition as well as the irregu- larity of daily contributions may strongly influence the utility of a final benchmark to be used in medium and long term loan contracts, especially with retail clients. Our focus is on several classes of benchmarks' formulae that are derived from this raw index and allow for some confinement of the mentioned drawbacks while decreasing quality measured by other criteria (goodness of fit). The set of classes include: the geometric time weights with different smoothing parameters and observation window's length used on the original raw index, stabilisation of the raw index in bands, rolling window volume weights rebalancing and finally the geometric time weights performed on log-transformed index (log-raw index is calculated from volume logarithms). The potential trade-offs in such a benchmark's stabilisation efforts are shown.

Suggested Citation

  • Marcin Dec, 2018. "On the trade-offs in money market benchmarks' stabilisation," KAE Working Papers 2018-039, Warsaw School of Economics, Collegium of Economic Analysis.
    • Handle: RePEc:sgh:kaewps:2018039
    as

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    File URL: http://kolegia.sgh.waw.pl/pl/KAE/Documents/WorkingPapersKAE/WPKAE_2018_039.pdf
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    References listed on IDEAS

    as
    1. 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

    financial market indices; interest rate benchmarks; compound Poisson process; index volatility reduction; transaction based benchmarks;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects

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