The Manipulation Potential of Libor and Euribor

55 Pages Posted: 15 Jan 2013 Last revised: 12 Nov 2014

See all articles by Alexander Eisl

Alexander Eisl

Vienna University of Economics and Business - Institute for Finance, Banking and Insurance; Vienna University of Economics and Business

Rainer Jankowitsch

WU (Vienna University of Economics and Business); Vienna Graduate School of Finance (VGSF)

Marti G. Subrahmanyam

New York University (NYU) - Leonard N. Stern School of Business

Date Written: October 25, 2014

Abstract

The London Interbank Offered Rate (Libor) and the Euro Interbank Offered Rate (Euribor) are two key market benchmark interest rates used in a plethora of financial contracts with notional amounts running into the hundreds of trillions of dollars. The integrity of the rate-setting process for these benchmarks has been under intense scrutiny ever since the first reports of attempts to manipulate these rates surfaced in 2007. In this paper, we analyze Libor and Euribor rate submissions by the individual panel banks and shed light on the underlying manipulation potential, by quantifying their effects on the final rate set (the "fixing"). We explicitly take into account the possibility of collusion between several market participants. Our setup allows us to quantify such effects for the actual rate-setting process that is in place at present, and compare it to several alternative rate-setting procedures. We find that such alternative rate fixings, particularly methodologies that eliminate outliers based on the median of submitted rates and the time-series of past submissions, could significantly reduce the effect of manipulation. Furthermore, we discuss the role of the sample size and the particular questions asked of the panel banks, which are different for Libor and Euribor, and examine the need for a transactions database to validate individual submissions.

Keywords: money markets, Libor, Euribor, manipulation, collusion

JEL Classification: G01, G14, G18

Suggested Citation

Eisl, Alexander and Eisl, Alexander and Jankowitsch, Rainer and Subrahmanyam, Marti G., The Manipulation Potential of Libor and Euribor (October 25, 2014). Available at SSRN: https://ssrn.com/abstract=2201013 or http://dx.doi.org/10.2139/ssrn.2201013

Alexander Eisl

Vienna University of Economics and Business - Institute for Finance, Banking and Insurance ( email )

Heiligenstaedter Strasse 46-48
Vienna, 1190
Austria

Vienna University of Economics and Business ( email )

Heiligenstadter-Strasse 46-48
Vienna, Wien A-1190
Austria

Rainer Jankowitsch (Contact Author)

WU (Vienna University of Economics and Business) ( email )

Welthandelsplatz 1
Vienna, Vienna AT1020
Austria
+43 1 31 336 4340 (Phone)
+43 1 310 0580 (Fax)

Vienna Graduate School of Finance (VGSF) ( email )

Welthandelsplatz 1
Vienna, 1020
Austria

Marti G. Subrahmanyam

New York University (NYU) - Leonard N. Stern School of Business ( email )

44 West 4th Street
Suite 9-160
New York, NY NY 10012
United States

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