Collusive Benchmark Rates Fixing

Tinbergen Institute Discussion Paper 2017-122/VII

68 Pages Posted: 15 Feb 2018 Last revised: 18 Apr 2019

See all articles by Nuria Boot

Nuria Boot

German Institute for Economic Research (DIW Berlin); KU Leuven

Timo Klein

University of Amsterdam - Amsterdam School of Economics (ASE)

Maarten Pieter Schinkel

University of Amsterdam - Department of Economics; Tinbergen Institute - Tinbergen Institute Amsterdam (TIA)

Multiple version iconThere are 3 versions of this paper

Date Written: April 1, 2019

Abstract

Benchmark rates, such as Libor and Euribor, are proven vulnerable to manipulation. We analyze benchmark rate collusion, which is challenging due to varying and opposing trading interests of the subset of market participants that determine the rates. Our theory is based on two mechanisms. We define front running as information sharing that allows cartel members to optimally adjust their portfolios ahead of the market. To support the joint-profit maximizing rate, designated traders engage in costly manipulation of their submissions. We find that observed episodic recourse to independent quoting is part of a feasible continuous collusion equilibrium and that all panel members would want to participate in the scheme. Our model suggests that high rate volatility may be indicative of collusion. Further protocol reforms to broaden the class of transactions eligible for submission and to average over fewer middle quotes can unintentionally facilitate collusion.

Keywords: benchmark rate, Libor, Euribor, IRD, banking, cartel

JEL Classification: E43, G14, G21, K21, L41

Suggested Citation

Boot, Nuria and Klein, Timo and Schinkel, Maarten Pieter, Collusive Benchmark Rates Fixing (April 1, 2019). Tinbergen Institute Discussion Paper 2017-122/VII. Available at SSRN: https://ssrn.com/abstract=3117398 or http://dx.doi.org/10.2139/ssrn.3117398

Nuria Boot (Contact Author)

German Institute for Economic Research (DIW Berlin) ( email )

Mohrenstraße 58
Berlin, 10117
Germany

KU Leuven ( email )

Oude Markt 13
Leuven, Vlaams-Brabant 3000
Belgium

Timo Klein

University of Amsterdam - Amsterdam School of Economics (ASE) ( email )

Roetersstraat 11
Amsterdam, North Holland 1018 WB
Netherlands

Maarten Pieter Schinkel

University of Amsterdam - Department of Economics ( email )

Roetersstraat 11
1018 WB Amsterdam
Netherlands
+31 20 525 7132 (Phone)
+31 20 525 5318 (Fax)

Tinbergen Institute - Tinbergen Institute Amsterdam (TIA) ( email )

Gustav Mahlerplein 117
Amsterdam, 1082 MS
Netherlands

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