LIBOR Manipulation – Empirical Analysis of Financial Market Benchmarks Using Benford's Law

Abstract

The London inter-bank offered rate (LIBOR) serves as a benchmark for many financial transactions worldwide today. These rates have been subject to manipulative conduct, false reporting and collusion. In forensic accounting, the Benford test has been implemented to successfully detect manipulated data. In this paper, we develop an approach to enable the application of the Benford method to LIBOR and other financial market benchmarks. The test results for all 150 LIBOR rates show a concentration of notably high deviations from the Benford distribution in single periods and currencies. Moreover, we find that the LIBOR quotes deviate much more than the banks’ credit default swap spreads. We conclude that all banks are presumably involved in the submission of manipulated data. Furthermore, we show that other financial benchmarks are worthy of closer scrutiny.

Keywords: Benford's law, Inter-bank offered rates, Financial institutions, Manipulation, Collusion, Price-fixing

JEL Classification: C16, G14, G24, K21