Working Paper: NBER ID: w20540
Authors: Darrell Duffie; Piotr Dworczak
Abstract: Recent scandals over the manipulation of LIBOR, foreign exchange benchmarks, and other financial benchmarks have spurred policy discussions over their appropriate design. We characterize the optimal fixing of a benchmark as an estimator of a market value or reference rate. The fixing data are the reports or transactions of agents whose profits depend on the fixing, and who may therefore have incentives to manipulate it. If the benchmark administrator cannot detect or deter the strategic splitting of trades, we show that the best linear unbiased fixing is the commonly used volume-weighted average price (VWAP).
Keywords: No keywords provided
JEL Codes: D82; G12; G14; G18; G23
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| design of benchmark fixings (L74) | incentives for manipulation by agents (D82) |
| transaction weights for statistical efficiency (F14) | manipulation incentives (C78) |
| small manipulations (D00) | cost-effectiveness for agents (L85) |
| optimal transaction weight (D23) | statistical optimal benchmark fixing (C51) |
| optimal fixing (H21) | volume-weighted average price (VWAP) (G12) |