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LIBOR's poker

Author

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  • Chen, Jiakai
Abstract
The recent LIBOR and ISDAfix manipulation scandals have inspired discussions about survey-based financial benchmarks. I investigate surveys as the statistical inference problem plagued by the principal-agent frictions between benchmark administrators and banks. Without knowing the distribution of private signals, an administrator can implement a sufficient expected quadratic penalty through random audits and post-audit fines to minimize reporting errors and induce a distribution-free expected benchmark bias. Sufficiently frequent random audits that discipline the bank with maximum borrowing cost can mitigate the impact of constraints on post-audit fines. Finally, delaying the release of bank reports may not be effective in fighting collusion.

Suggested Citation

  • Chen, Jiakai, 2021. "LIBOR's poker," Journal of Financial Markets, Elsevier, vol. 55(C).
    • Handle: RePEc:eee:finmar:v:55:y:2021:i:c:s1386418120300550
    DOI: 10.1016/j.finmar.2020.100586
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    More about this item

    Keywords

    LIBOR; Principal-agent problem; Statistical inference; Mechanism design; Benchmarking;
    All these keywords.

    JEL classification:

    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • D44 - Microeconomics - - Market Structure, Pricing, and Design - - - Auctions
    • D47 - Microeconomics - - Market Structure, Pricing, and Design - - - Market Design
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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