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Index Theory: The Law, Promise and Failure of Financial Indices

Gabriel V. Rauterberg

Columbia University - Law School; Columbia University - Columbia Business School

Andrew Verstein

Wake Forest University School of Law

October 5, 2012

Yale Journal on Regulation, Vol. 30, No. 1, 2013

Financial indices, like the S&P 500 or the Consumer Price Index, have become a ubiquitous feature of our financial markets. One index, the London InterBank Offered Rate (“Libor”), may be the world’s most important number, an interest rate benchmark upon which hundreds of trillions of dollars depend. Yet, almost everyday new revelations emerge that Libor was tampered with during the height of the financial crisis by one or many of the world’s most prominent banks, with billions of dollars potentially misappropriated. This index disruption has attracted tremendous interest from regulators, private litigants, and market observers. Despite their importance, however, financial indices are poorly understood, and almost completely unstudied. In this Article, we explain why and how people use financial indices as well as how they are created. We show human discretion and value judgment to be essential ingredients in even the most “objective” indices. We then develop a taxonomy of financial indices, illustrating how the risks indices can pose, and the solutions applicable to those risks are intimately related to the motivation that drives the index’s creation. We show that the manipulation of indices is unsurprising given the precarious state of intellectual property rights in indices. While many call for prosecuting or regulating the Libor banks, our novel solution is to strengthen property rights for those who create financial indices.

Number of Pages in PDF File: 62

Keywords: Index, Indices, Libor, Swap, Derivative, Manipulation, Underproduction, Malproduction, Hot News, London InterBank Offered Rate, Finance, Syndicated Lending, CPI, S&P 500

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Date posted: March 18, 2012 ; Last revised: March 27, 2013

Suggested Citation

Rauterberg, Gabriel V. and Verstein, Andrew, Index Theory: The Law, Promise and Failure of Financial Indices (October 5, 2012). Yale Journal on Regulation, Vol. 30, No. 1, 2013. Available at SSRN: http://ssrn.com/abstract=2025124 or http://dx.doi.org/10.2139/ssrn.2025124

Contact Information

Gabriel V. Rauterberg
Columbia University - Law School ( email )
435 West 116th Street
New York, NY 10025
United States
2036066754 (Phone)
HOME PAGE: http://web.law.columbia.edu/capital-markets/about-us/research-scholar
Columbia University - Columbia Business School ( email )
3022 Broadway
New York, NY 10027
United States

Andrew Verstein (Contact Author)
Wake Forest University School of Law ( email )
P.O. Box 7206
Winston-Salem, NC 27109
United States
3367585433 (Phone)
HOME PAGE: http://law.wfu.edu/faculty/profile/verstea/

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