Market Responses to LIBOR Misrepresentation of Credit Risk
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The London Inter Bank Offered Rate, or LIBOR, is used to reflect the cost of unsecured, overnight debt for large financial institutions and is used to price over $300 Trillion in financial contracts, worldwide. Although banks were penalized for defrauding the process of fixing LIBOR during the 2007-2009 Financial Crisis, no papers have studied the influence that LIBOR submissions had on other credit-risk indicators. In this paper, I use a Granger Causality Test to determine whether LIBOR submissions Granger Cause movements in these indicators. I find that changes in LIBOR rates Granger Cause changes in other credit-risk indicators but show a meaningfully different relationship from 2007- 2009. The post-crisis relationship strengthens and suggests a restoration of confidence from 2010-2017. I interpret this as evidence of the isolated costs of LIBOR misrepresentation upon the functioning of broader credit markets and the restoration of market balance by market participants and regulations.