Information Aggregation in the Libor Rate-Setting Process and the Effects of False Reporting
Speaker: Dr Conall O'Sullivan, UCD Smurfit Graduate Business School
Time: 3.00PM
Date: Wednesday 22 October 2014
Location: Room H1.52, UCD Science Hub, University College Dublin,
Abstract: We present an analytical model of Libor rate setting in which the Libor quote setting process serves to aggregate bank-specific information on market-clearing interest rates. We use the model to analyse the impact on the Libor rate of false (and undetected) reporting by one or more banks intending to manipulate the Libor rate. We analyse the potential trading profits to interest rate derivatives traders aware of the false reporting, and the economic costs associated with the loss of Libor rate integrity after false reporting is publicly detected. We calibrate the model to observed Libor panel data and find with a functioning Libor system, the daily uncertainty (standard deviation) in the estimate of the true market-clearing rate is less than 4 basis points. In the autarky case (no Libor panel or a badly corrupted Libor panel) this increases to approximately 5.5 basis points. This rise in uncertainty from the loss of the Libor information aggregation process is our estimate of the economic cost of false Libor reporting.
Series: Applied and Computational Mathematics Seminar Series
Please Note: All are welcome and tea/coffee will be provided
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