Market Manipulation and Moral Hazard: Can the LIBOR be Fixed?

31 Pages Posted: 28 Jan 2013

Date Written: January 27, 2013

Abstract

The aim of this work is to focus on the recent allegations of LIBOR rates manipulation. We show clear evidence that the individual contribution of each bank in the LIBOR submission process did not have a relevant impact on the rates level. Only through a synchronized "cartel-type" effort banks were allegedly able to fix the interest rate with a significant difference. For the case of USD LIBOR we developed a factorial modeling that captures the its relationship with US Treasury rates and Credit Default Swap spreads. Under this hypothesis we rebuilt a theoretical LIBOR that can peak 1% above the observed LIBOR during 2008.

Keywords: moral hazard, market manipulation, pump and dump, LIBOR, forensics econometrics

JEL Classification: C22

Suggested Citation

Frunza, Marius, Market Manipulation and Moral Hazard: Can the LIBOR be Fixed? (January 27, 2013). Available at SSRN: https://ssrn.com/abstract=2207703 or http://dx.doi.org/10.2139/ssrn.2207703

Marius Frunza (Contact Author)

University Paris Dauphine ( email )

Place du Maréchal de Lattre de Tassigny - 75775 PA
Paris, 75775
France

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