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LIBOR's poker

Jiakai Chen

Journal of Financial Markets, 2021, vol. 55, issue C

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.

Keywords: LIBOR; Principal-agent problem; Statistical inference; Mechanism design; Benchmarking (search for similar items in EconPapers)
JEL-codes: D43 D44 D47 G10 G21 (search for similar items in EconPapers)
Date: 2021
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DOI: 10.1016/j.finmar.2020.100586

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Journal of Financial Markets is currently edited by B. Lehmann, D. Seppi and A. Subrahmanyam

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