Market Responses to LIBOR Misrepresentation of Credit Risk




Rhodes, Joshua

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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.



Finance, Economics, Econometrics, Money and Banking