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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. 'Thehypothetical problems with: changes in the panel's composition as well as the irregularity of daily contributions may strongly influence the utility of a final benchmark tobe 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 indexand allow for some confinement of the mentioned drawbacks while decreasing qualitymeasured by other criteria (goodness of fit). The set of classes include: the geometric time weights with different smoothing parameters and observation window's lengthused on the original raw index, stabilisation of the raw index in bands, rolling windowvolume 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
    DOI: 10.33119/kaewps2018039
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    File URL: https://hdl.handle.net/20.500.12182/1139
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    References listed on IDEAS

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    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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    Keywords

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    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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