|3/10/2006 Barclays (source: FSA.gov.uk, 6/27/2012)|
Diagnosing the LIBOR: Strategic Manipulation and Member Portfolio Positions
Thomas YouleyUniversity of Minnesota
February 7, 2009Preliminary and Incomplete
The London Interbank Offered Rate (Libor) is a vital benchmark interest rate to which hundreds of trillions of dollars of financial contracts are tied. We provide new evidence that panel banks may have misreported actual borrowing costs when quoting rates to the Libor survey. This evidence stems from discontinuities involved in the Libor's construction. We introduce a simple model where banks' possession of Libor indexed contracts leads them to quote rates that are clustered at discontinuities and show that such clustering has been severe in the 3-Month U.S. Libor throughout 2009. We then present suggestive evidence that several banks have large exposures to the Libor through their interest rate derivative portfolios and have recently profited from the rapid descent of the Libor.
Continue reading here or here. And read this by the authors: Does the LIBOR reflect banks' borrowing costs? (April 2, 2010).