Collusive Benchmark Rates Fixing

Nuria Boot (), Timo Klein () and Maarten Pieter Schinkel ()
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Nuria Boot: KU Leuven, DIW Berlin
Timo Klein: Amsterdam School of Economics, University of Amsterdam
Maarten Pieter Schinkel: Amsterdam School of Economics and ACLE, University of Amsterdam

No 17-122/VII, Tinbergen Institute Discussion Papers from Tinbergen Institute

Abstract: Benchmark rates, such as Libor and Euribor, are proven vulnerable to manipulation. We analyze benchmark rate collusion, which is challenging due to varying and opposing trading interests of the subset of market participants that determine the rates. Our theory is based on two mechanisms. We define front running as information sharing that allows cartel members to optimally adjust their portfolios ahead of the market. To support the joint-profit maximizing rate, designated traders engage in costly manipulation of their submissions. We find that observed episodic recourse to independent quoting is part of a feasible continuous collusion equilibrium and that all panel members would want to participate in the scheme. Our model suggests that high rate volatility may be indicative of collusion. Further protocol reforms to broaden the class of transactions eligible for submission and to average over fewer middle quotes can unintentionally facilitate collusion.

Keywords: Libor; benchmark rate, Libor, Euribor, IRD, banking, cartel (search for similar items in EconPapers)
JEL-codes: E43 G14 G21 K21 L41 (search for similar items in EconPapers)
Date: 2017-12-27, Revised 2019-04-17
New Economics Papers: this item is included in nep-ban, nep-cdm, nep-com, nep-gth and nep-law
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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