Darrell Duffie, Piotr Dworczak, 01 November 2014

Recent scandals involving some financial benchmarks have shaken the confidence in them. Regulators have responded with sanctions and with actions to support more robust benchmarks. This column presents new research on how a benchmark administrator would optimally weigh transaction prices to produce a fixing. Weights assigned to the observed prices should be increasing in the size of the transactions. However, in this setting, it is typically impossible to implement a benchmark in a complete absence of manipulation.   

Avinash Persaud, 21 July 2012

The Libor scandal rolls on – feeding a common perception of widespread bank misbehaviour. This column argues that understanding the crisis strengthens the sense of a conspiracy, but weakens the sense of criminality. The Libor system could not function in periods of extreme stress where the interbank market disappeared and reporting higher borrowing costs led to even higher borrowing costs. As Mervyn King said, Libor was the rate at which the banks didn’t lend to each other. One possible reform would replace Libor with some commonality of lending rates between major central banks and prime banks.

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