LIBOR: Origins, Economics, Crisis, Scandal, and Reform

The London Interbank Offered Rate (LIBOR) is a widely used indicator of funding conditions in the interbank market. As of 2013, LIBOR underpins more than $300 trillion of financial contracts, including swaps and futures, in addition to trillions more in variable-rate mortgage and student loans. LIBOR's volatile behavior during the financial crisis provoked questions surrounding its credibility. Ongoing regulatory investigations have uncovered misconduct by a number of financial institutions. Policymakers across the globe now face the task of reforming LIBOR in the aftermath of the scandal and crisis

Identifying Term Interbank Loans from Fedwire Payments Data

Interbank markets for term maturities experienced great stress during the 2007-09 financial crisis, as illustrated by the behavior of one- and three-month Libor. Despite widespread interest in these markets, little data are available on dollar interbank lending for maturities beyond overnight. We develop a methodology to infer individual term dollar interbank loans (for maturities between two days and one year) by applying a set of filters to payments settled on the Fedwire Funds Service, the large-value bank payment system operated by the Federal Reserve Banks. Our approach introduces several innovations and refinements relative to previous research by Furfine (1999) and others that measures overnight interbank lending. Diagnostic tests to date suggest our approach provides a novel and useful source of information about the term interbank market, allowing for a number of research applications. Limitations of the algorithm and caveats on its use are discussed in detail. We also present stylized facts based on the algorithm's results, focusing on the 2007-09 period. At the crisis peak following the failure of Lehman Brothers in September 2008, we observe a sharp increase in the dispersion of inferred term interbank interest rates, a shortening of loan maturities, and a decline in term lending volume

The Fix is In: Detecting Portfolio Driven Manipulation of the LIBOR ∗

The London Interbank Offered Rate (Libor) is a set of vital benchmark interest rates to which hundreds of trillions of dollars of financial contracts are tied. The rates are set each day via a survey of large banks. In recent years, strange behavior of the rates have caused observers to question its proper function and some to suggest overt manipulation as the cause. Subsequent regulatory investigations have culminated in admissions of manipulation by at least three Libor panel banks. In this paper we develop tests for manipulation based on a model of bank submissions to the survey. Our results suggest manipulation was widespread and may have persisted into the more recent past, somewhat at odds with the picture painted by publicly available sources

Replication data for: Barriers to Entry in the Airline Industry: A Multi-Dimensional Regression-Discontinuity Analysis of AIR-21

Snider, Connan, and Williams, Jonathan W., (2015) "Barriers to Entry in the Airline Industry: A Multi-Dimensional Regression-Discontinuity Analysis of AIR-21." Review of Economics and Statistics 97:5, 1002-1022

LM Test of Neglected Correlated Random Effects and Its Application

<p>This article aims at achieving two distinct goals. The first is to extend the existing LM test of overdispersion to the situation where the alternative hypothesis is characterized by the correlated random effects model. We obtain a result that the test against the random effects model has a certain max-min type optimality property. We will call such a test the LM test of overdispersion. The second goal of the article is to draw a connection between panel data analysis and the analysis of multiplicity of equilibrium in games. Because such multiplicity can be viewed as a particular form of neglected heterogeneity, we propose an intuitive specification test for a class of two-step game estimators.</p