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: Suggested Citation