Interbank Offer Rate Research Articles

Liquidity of Government of India Bonds: Trading Volume Based Analysis

Objective: Bonds experience high trading volume right after their issuance. Outstanding amount of a bond is built by multiple follow on reissuances. Trading volume also picks up when bond is reissued. This paper investigates impact of bond’s age since issuance on its weekly trading volume. In addition it also investigates impact of trade size, outstanding amount, Foreign Institutional Investor (FII) trading, Repo rate volatility, Yield to Maturity volatility and Mumbai Interbank Offer Rate (MIBOR) volatility in the Indian context. Design, Methodology & Approach: This paper builds on Hong and Warga (2000), Kalimipalli and Warga (2002), and Diaz et. al. (2006). Non-linear regression is used to investigate exponential decay of weekly trading market share of 5, 10 and 30 Year bonds with respect to age. The model also explores linear relationship of other factors on the weekly trading volume. Findings: (This) Our research finds evidence of decay in trading with respect to bond age, reissuance and trade size. The model suggests two issuances of 5 year, three issuances of 10 Year and one issuance of 30 year bond per year for optimum trading volume in the Government of India (GoI) bond market. Implications: GoI publishes a tentative schedule with no indication of which tenure will be auctioned. This uncertainty impacts the trading as market lacks anticipation of maturity segments in the yield curve. A regular schedule of 5, 10 and 30 year bonds provides for better public debt management with enhanced trading liquidity and lower cost of public debt. Originality & Value: Literature review provides no evidence of similar study in Indian context. Hence it is the first study of this kind. This study provides a bond issuance approach for enhanced public debt management, market trading and lower cost of public debt. Research Limitations: Due to lack of data, over the counter (OTC) trades are not incorporated in the analysis. Inclusion of treasury bills trades in the model may provide better understanding of trading risk.

Karachi inter-bank offered rate (kibor) forecasting: Box-jenkins (arima) testing approach

The aim of this paper is to find out the forecasting model that is the one, which gives the best output of forecasting. So that policy makers can be benefited from this research. Thus, this research will also evaluate the performance of ARMA, and Box-Jenkins (ARIMA) forecasting models for KIBOR in case of Pakistan. Karachi Inter Bank Offer Rates (KIBOR) is the average interest rate at which banks want to lend money to other banks. KIBOR as a benchmark, to encourage transparency, to promote consistency in market based pricing and to improve management of the market risk undertaken by banks. Researchers have used 6-month rates of KIBOR; data is of 4 years from 2012 to 2015. Therefore, keeping in view of the importance of KIBOR, the objective of this research is to forecast, Karachi Inter Bank Offer Rates (KIBOR) using time series autoregressive moving average (ARMA), Box-Jenkins (ARIMA) model. The study is significant at 1%, the forecasting of rates shows that the rates are very close to the actual one and it further concluded that the applied model Box-Jenkins (ARIMA) is perfect for the forecasting. The results of AIC revealed that there is no evidence of autocorrelation and there is no sample error and the model is useful and robust. It is finally concluded that the forecasting of KIBOR rates by ARIMA (Box-Jenkins) model is very helpful for policy makers. The results extracted from this model are reliable for making any forecasting and also beneficial for government functionaries, financial experts and policy makers of financial institutions in order to device their future strategies.

China’s Macroeconomic Fundamentals on Stock Market Volatility: Evidence from Shanghai and Hong Kong

This paper examines the effect of Chinese macroeconomic variables, the industrial production growth rate, the producer price index, the 3-month short-term Shanghai Interbank Offer Rate and the consumer price index, on the volatility of the Shanghai and Hong Kong stock markets. We apply the generalized autoregressive conditional heteroskedastic mixed data sampling model for the study. Our empirical findings on various indexes and enterprises in the Shanghai and Hong Kong markets show that Chinese macroeconomic variables have a greater power to explain the volatility in Hong Kong than in Shanghai. They also contribute significantly to Hong Kong’s market volatility.

FAKTOR-FAKTOR YANG MEMPENGARUHI NILAI TUKAR RUPIAH TERHADAP DOLAR AMERIKA DENGAN MODEL KOREKSI KESALAHAN ENGLE-GRANGER (PENDEKATAN MONETER)

Exchange rate measures the value of a certain foreign exchange from other foreign exchange's perspective. As the condition of economic changes, the exchange rate ma change substantially. The decrease of the value of a foreign exchange is called depreciation and the increase value of a foreign exchange is called appreciation.The equilibrium exchange rate will change along with the change of demand and supply. Factors causing the change of demand and supply curve among others are the amount of money supply, relative gross domestic product (GDP) and the level of relative interest rate.The research is aimed to analyze the influence of variables of Indonesian money supply, American money supply, Indonesian real Gross Domestic Product, American real Gross Domestic Product, deposits interest rate and LIBOR (London Interbank Offer Rates on SDR Deposit) both in short and long terms.One of the ways to analyze the influence of short term and long term is by developing the dynamic model. In this research, the analyzes of dynamic model was conducted with ENGEL-GRANGER ERROR CORRECTION MODEL approach which was developed by ENGEL-GRANGER (1987) based on GRANGER REPRESENTATION THEOREM.The ECM analyzes was chosen not only because of its ability to solve the problem of time series which is not stationer, and spurious regression and spurious correlation in the economic analyses but also its ability to discuss the consistence of empiric model with economic theory. Beside, ECM concept is also thought to be more realistic in observing the development of economics variables from the result of the analyzes during the time of observation. It was known that long-term exchange rate is influenced by Indonesia real Gross Domestic Product and the number of Indonesian money supply. The variable of Indonesian real Gross Domestic showed the significant result and the signal test was convenient with the theory. The variable which influence" short term exchange rate are the amount of Indonesian money supply, Indonesian real Gross Domestic Product, and Indonesian deposit interest rate. The three variables showed the significant result and the signal test was convenient with the theory.

ANALISIS PERMINTAAN DEPOSITO DALAM VALUTA ASING PADA BANK SWASTA NASIONAL DI INDONESIA

High demand for foreign currency deposit is the background of this research with purpose to analyze influence Gross Domestic Product (GDP) per capita, Rupiah deposit interest rate, exchange rate Rupiah to America Dollar, and London Interbank Offer Rate (LIBOR) international interest rate for deposit demand in foreign currency in National Private Bank in Indonesia. To analyze that influence quadratic linear regression analysis used with Partial Adjustment Methods (PAM). From classic assumption test, there's no multicollinearity, heteroscedasticity, and autocorrelation. From statistical test resulted (test-t) that foreign currency savings from previous period, Rupiah deposit interest rate and LIBOR international interest rate have effect to deposit demand in foreign currency, with different validity rate such as: a = 1%, a ~ 5% and a = 10%, meanwhile GDP per capita and exchange rate have no affect to deposit demand in foreign currency. F-Test result that with validity level 99%, independent variables concurrently have effect to dependent variable. R2 result shows that 98% variance foreign currency deposit effect can be explained by variance in model, the other 2% explained by other variable excluded from applied model. However, long term adjustment value (d) amount

Why bond market couldn’t thrive in Pakistan

Fixed income market has recently emerged in Pakistan. Onward 1990, prolusion of government securities paved a way for corporates to come forward with their debt papers and long term yield curve came in to existence by introducing FIB’s in 1992 followed by issuance of first Term Finance Certificates (TFC) in 1995. The TFCs’ coupon rate exhibits a wide range of different fixed and floating coupons related to numerous interest rates containing the discount rate, the Karachi Inter-bank Offer Rate (KIBOR) and Pakistan Investment Bond (PIB) rates. The SBP launched electronic trading platform for fixed income securities on 11th January, 2010 with the intention of improving the functioning and profundity of primary and secondary markets of sovereign bonds. The data available reveals that through this platform, the cumulative trading of sovereign securities touched 66% of the overall trading volume till the end of 2010 relative to 58.0% in January, 2010. In its initial stage, the E-bond platform provided the complete trading of sovereign bonds like T-bills, PIBs and Ijarah Sukuk. The other type of fixed income securities like repo, FRAs and swaps facilitated in subsequent phases.

Linear Interpolation of Interbank Offered Rates - A Case Study of LIBOR & NIBOR

Interbank offered rates are benchmark interest rates at which a selection of banks can borrow and lend to one another in a given currency on a short-term basis. However, these rates are only available for certain tenors thereby creating the need to interpolate rates for tenors without directly observable rates. The aim of this paper is to discuss a practical method for linearly interpolating interbank offered rates with a special focus on the London Interbank Offered Rates (LIBOR) and the Nigerian Interbank Offered Rates (NIBOR).

Is LIBOR Still Being Manipulated?: Identifying Colluders with Methods of Detecting LIBOR Tampering

We analyze the one-month U.S. Dollar London Interbank Offer Rate (LIBOR) between January 1987 and February 2015 to determine whether there are signs of manipulation based on a previously published test that has appeared in a peer reviewed economics journal and been cited in the business press and legal filings of major financial disputes. Our analysis starts with the period from February 1, 2014 to February 28, 2015, after the Intercontinental Exchange (ICE) took over the publication of LIBOR from the British Bankers’ Association (BBA) and after significant time for reforms to be implemented related to the widely publicized LIBOR fixing messages between bankers, as detailed to the British government in the Wheatley Report. We find that this previously published test still indicates the presence of LIBOR manipulation from February 2014 and into 2015. We then perform the previously published test for tracking the integrity of important market indicators, such as LIBOR, from 1987 through February 2015, and find that this test would nearly always trigger a finding of suspicious behavior, either indicating that LIBOR has been consistently manipulated since 1987 to 2015 or that the proposed test has no power to distinguish periods of LIBOR manipulation from periods of non-manipulation. We further discuss the nature of scientific evidence and how the use of non-scientific methods, if taken seriously, can lead to the misallocation of corporate, regulatory, enforcement, and potentially, in the case of such a widely use financial measure as LIBOR, global economic resources.

Amicus Curiae Brief in Gelboim v. Bank of America (Libor Manipulation Litigation) on Behalf of Financial Markets Law Professors in Support of Plaintiffs-Appellants

This amicus brief, filed with the Second Circuit Court of Appeals in Gelboim v. Bank of America (LIBOR Manipulation Litigation), primarily aims to help the Court by providing relevant background information. Many of the plaintiffs in this case are bringing antitrust claims based on defendant banks' alleged collusion while selling plaintiffs over-the-counter derivatives. To evaluate these plaintiffs’ allegations, one must understand the nature of these derivative transactions, the economics of the over-the-counter derivatives market, and the specific role that the London Interbank Offer Rate (“LIBOR”) plays in that market. This brief provides that information. With this background in place, it becomes clear that these plaintiffs have properly alleged an antitrust injury. Plaintiffs allege that defendants, who controlled the over-the-counter derivatives market, conspired to manipulate LIBOR in order to increase their profits in the over-the-counter derivatives market. Plaintiffs allege that they, in their capacity as defendants’ customers in the over-the-counter derivatives market, suffered an injury as a result of defendants’ collusive LIBOR-setting behavior. Taking plaintiffs’ allegations as true, this is a classic antitrust injury.Accordingly, this court should reverse the district court’s opinion and remand for further proceedings.

Long-Run Determinants of Equity Foreign Portfolio Investment (EFPI) in Sri Lanka: A Time Series Analysis with Autoregressive Distributive Lag (ARDL) Approach

Equity Foreign Portfolio Investment (EFPI) is useful in enhancing the efficiency and liquidity of capital markets. This study explores the long-run determinants of EFPI in Sri Lanka using the autoregressive distributed lagged (ARDL) model. The dataset covers monthly time series data from 2004 to 2013. The findings suggest that the London Inter-Bank Offered Rates (LIBOR), foreign reserves presented in months of imports, USD/LKR exchange rate and domestic share market performance measured by the All Share Price Index (ASPI) are statistically significant and have a long-run positive effect on EFPI. The remaining variables, three-month Treasury bill rates, the Colombo Consumer Price Index (CCPI) and the S&P500 index are statistically insignificant. It is further revealed that there is a short-run causality running from months of imports, three month Treasury bill rates, USD/LKR exchange rates and CCPI towards EFPI at the Colombo Stock Exchange (CSE).

Volatility forecasting for interbank offered rate using grey extreme learning machine: The case of China

Interbank Offered rate is the only direct market rate in China’s currency market. Volatility forecasting of China Interbank Offered Rate (IBOR) has a very important theoretical and practical significance for financial asset pricing and financial risk measure or management. However, IBOR is a dynamics and non-steady time series whose developmental changes have stronger random fluctuation, so it is difficult to forecast the volatility of IBOR. This paper offers a hybrid algorithm using grey model and extreme learning machine (ELM) to forecast volatility of IBOR. The proposed algorithm is composed of three phases. In the first, grey model is used to deal with the original IBOR time series by accumulated generating operation (AGO) and weaken the stochastic volatility in original series. And then, a forecasting model is founded by using ELM to analyze the new IBOR series. Lastly, the predictive value of the original IBOR series can be obtained by inverse accumulated generating operation (IAGO). The new model is applied to forecasting Interbank Offered Rate of China. Compared with the forecasting results of BP and classical ELM, the new model is more efficient to forecasting short- and middle-term volatility of IBOR.

Rational multi-curve models with counterparty-risk valuation adjustments

We develop a multi-curve term structure set-up in which the modelling ingredients are expressed by rational functionals of Markov processes. We calibrate to London Interbank Offer Rate swaptions data and show that a rational two-factor log-normal multi-curve model is sufficient to match market data with accuracy. We elucidate the relationship between the models developed and calibrated under a risk-neutral measure and their consistent equivalence class under the real-world probability measure . The consistent -pricing models are applied to compute the risk exposures which may be required to comply with regulatory obligations. In order to compute counterparty-risk valuation adjustments, such as credit valuation adjustment, we show how default intensity processes with rational form can be derived. We flesh out our study by applying the results to a basis swap contract.

Too LIBOR, Too Late: Time to Move to a Market Rate

Barclays has been fined, the British have issued their report, and now the market is anxious for everything to go on as usual with the London Interbank Offer Rate (“LIBOR”). I think that would be a serious mistake. The U.S. and British investigations into rate-fixing by Barclays revealed a widespread culture of pervasive, deceitful conduct in the setting of the most important private sector benchmark for over $300 trillion in derivative contracts and $10 trillion in adjustable-rate loans. It is highly unlikely that Barclays was the only major bank engaging in this conduct, and public investigations and private lawsuits against a range of participants in LIBOR rate-setting are likely to reveal further misconduct in the months ahead. The basic structure for the setting of LIBOR is fundamentally flawed. It permits banks with obvious conflicts of interest to skew the LIBOR rate in order to benefit their own firm. Barclays, for example, was alleged to have attempted to manipulate LIBOR to benefit its traders and to hide its growing costs of borrowing in the financial crisis. The LIBOR structure also facilitates collusion among the rate-setting banks, in violation of the antitrust laws. Barclays, for example, was alleged to have attempted to manipulate LIBOR in collusion with other firms to benefit particular trades over a number of years. Both public antitrust investigations and a range of private lawsuits are likely to be pursued with vigor in the coming months. The collusion and manipulation were alleged to have occurred during both quiescent markets and turbulent ones. That is, the attempted manipulation of LIBOR was apparently not confined to one extraordinary “once-in-a-lifetime” financial crisis, when extreme market pressures might have lured firms to engage in this unlawful conduct, but rather was ingrained in the regular setting of rates. As it currently stands, LIBOR is not a market interest rate. It provides the illusion of market rates that are relied upon by everyone from sophisticated derivative traders to ordinary mortgage borrowers, but the rate itself is pure fiction. Banks submit a rate at which they supposedly could borrow, but there’s no requirement that the rates submitted be based on actual transactions. As Mervyn King, Governor of the Bank of England put it, LIBOR represents “the rate at which banks do not lend to each other.”

Long-term association between European and Indian markets on carbon credit price

Abstract This study tries to explore cointegration and Granger causality of daily CER prices in European Energy Exchange and Multi Commodity Exchange (MCX) in India in a multivariate framework after controlling euro–rupee exchange rate and Inter-Bank Offer Rate, a measure of country specific risk. Both ARDL bounds tests and Johansen–Juselius maximum likelihood procedures fail to establish a cointegrating relationship among the variables indicating that an arbitrage opportunity exists between these two markets. The study, however, establishes a short-term Granger causality running from change in CER price in European Energy Exchange and exchange rate to Indian exchange. Generalised error variance decomposition of variables indicates that the price of CER at the Indian stock exchange is most endogenous in nature.

Dependence structure between LIBOR rates by copula method

This paper discusses the correlation structure between London Interbank Offered Rates (LIBOR) by using the copula function. We start from one simplified model of A. Brace, D. Gatarek, and M. Musiela (1997) and find out that the copula function between two LIBOR rates can be expressed as a sum of an infinite series, where the main term is a distribution function with Gaussian copula. Partial differential equation method is used for deriving the copula expansion. Numerical results show that the copula of the LIBOR rates and Gaussian copula are very close in the central region and differ in the tail, and the Gaussian copula approximation to the copula function between the LIBOR rates provides satisfying results in the normal situation.

Detection of manipulation of inter-bank overnight rate using Euclidean-based time series cluster analysis

The interbank offered rate (IBOR) is the interest rate at which banks can borrow funds from other banks in the interbank market. It is also used as the benchmark upon which rates or financial contracts for less preferred borrowers are based. In light of the recent London IBOR (LIBOR) manipulation incident, this paper seeks to address the concern that IBOR is entirely controlled by the banks. The paper focuses on the comparison between LIBOR and Singapore IBOR (SIBOR) especially with regards to the behaviour of the interest rate with time. The nature of IBORs is such that the rates submitted by the banks will naturally be similar and should not differ excessively from the market as well as the other banks. We will compare the LIBOR and SIBOR from 2005 to 2011 with respect to the one-month rates on an annual basis. The results of our study support that the SIBOR is not manipulated like LIBOR.

The Role of Ethics in the Anglo-Saxon Financial System

The current process of the globalization of finance has showed significant questions related to the behaviour of market participants and to the ethical dimension of business operations, particularly in the Anglo-Saxon financial system. In this context, the recent banking and corporate scandals (such as, for example, the collapse of Northern Rock, Lehman Brothers and the manipulation of the London Interbank Offered Rate – LIBOR) revealed the problematic relationship between some financiers and ethics. This paper attempts to argue that the Anglo-Saxon financial market is centred on an attention to increase in profit, an objective which comes under a regulatory framework marked by the adoption of “principles-based” schemes and forms of self-regulation. For this reason there is a need to give particular attention to the proper functioning of financial relationships, with a view to safeguarding the interests of all actors who operate in the market. As a result, the achievement of acceptable levels of ethics depends on “prudent management” and, therefore, on the ability of intermediaries to pursue operational conducts based on fairness and transparency.

Problems Inherent in Libor/Euribor/Shibor, 'Netting', the Liquidity Coverage Ratio; And New Recommendations for US FSOC's Processes, and Libor/Shibor/Euribor Rate-Setting Processes.

The LIBOR rate-setting scandal of 2012-2013 illustrated weaknesses inherent in LIBOR and similar benchmarks such as the Euro Interbank Offered Rate (“EURIBOR” - the analogous benchmark rate for interbank lending in Euros) and the Shanghai Interbank Offer Rate (“SHIBOR” - the analogous benchmark rate for interbank lending in Reminbi). LIBOR, EURIBOR and SHIBOR are key benchmarks that determine interest rates for more than US $450 trillion of transactions and financial instruments around the world. Thus, even small errors in the rate-setting processes for these benchmarks can have substantial effects on monetary policies, on the profitability of financial institutions and regular companies; and on household finances. The problems inherent in the rate-setting processes for key benchmark interest rates (eg. LIBOR, EURIBOR and SHIBOR) are pervasive, structural and cannot be solved by either existing or proposed rate-setting mechanisms. However, the principles and rate-setting mechanisms introduced in this article can serve as foundations for further research on rate-setting mechanisms.The US FSOC’s Criteria for identifying SIFIs are inaccurate and are likely to result in false positives and false negatives. Similarly, the Basel Committee on Banking Supervision’s (BCBS) criteria for identifying systemically important financial companies and banks are inaccurate and limited (the five categories of risk importance are interconnectedness; size; complexity; cross-jurisdictional activity; substitutability/financial institution infrastructure). Most forms of “Netting” of derivatives are highly inaccurate and misleading. Netting was a primary cause of the Global Financial Crisis because it lead to gross misstatements of the true risks of many derivatives. Similarly, the Liquidity Coverage Ratio is misleading.

Financial Market Misconduct and Public Enforcement: The Case of Libor Manipulation

Using comprehensive data on London Interbank Offer Rate (Libor) submissions from 2001 through 2012, we provide evidence consistent with banks manipulating Libor to profit from Libor-related positions and to signal their creditworthiness during distressed times. Evidence of manipulation is stronger for banks that were eventually sanctioned by regulators and disappears for all banks in the aftermath of the Libor investigations that began in 2010. Our findings suggest that the threat of large penalties and the loss of reputation that accompany public enforcement can be effective in deterring financial market misconduct. This paper was accepted by Adams, Renee, finance.

On the Time-varying Linkages among the London Interbank Offer Rates for Major European Currencies

We employ an asymmetric dynamic conditional correlation model to investigate the time-varying integration of the London Interbank Offered Rate (LIBOR) rates for three major European currencies ‒the euro (EUR), Swiss franc (CHF), and British pound (GBP). We assess the impacts of the global financial crisis and the European sovereign debt crisis on cross-currency dynamic correlations. Our findings suggest that the correlations are influenced more by negative innovations than by positive ones for the GBP-CHF and CHF-EUR pairs. While the global financial crisis increased the degree of interbank money market integration, the European debt crisis contrastingly decreased the dynamic correlations for each pair of LIBOR rates.