Log in
Lost password
Become a member for free
Sign up
Sign up
Dynamic quotes 

4-Traders Homepage  >  News


Latest NewsCompaniesMarketsEconomy & ForexCommoditiesHot NewsMost Read NewsRecomm.Business LeadersVideosCalendar 

Bank of Japan : (Research Paper) Application of a Search Model to Appropriate Designing of Reference Rates

12/28/2012 | 02:06am US/Eastern

: Actual Transactions and Expert Judgment

December 28, 2012
Shun Kobayashi*


This study, based on a search model, attempts to draw out the implications for discussions about reference rates that originated from the recent Libor manipulation scandal, with particular focus on whether the calculation of reference rates should be based solely on actual transaction data and whether the use of expert judgment should be allowed. Generally speaking, yields on financial instruments can be decomposed into elements such as risk-free rate, (credit and/or market) risk premium, and liquidity premium. The reference rate is not exceptional. In developing a model, given that in times of crisis, liquidity dried up in interbank markets where reference rates are calculated, we use a search-based asset pricing model by Duffie, Garleanu, Pedersen (2005, 2007) to consider a situation in which market transactions are sporadic. In evaluating asset prices, we also combine this model with the robust control method, a technique for incorporating model uncertainty (e.g., a situation in which market participants lose confidence in their own pricing models and market prices during crises). The results suggest a jump in the liquidity premium to the level exceeding the risk premium based on the fundamentals, while being amplified by uncertainty. Given that reference rates are broadly used in deciding lending rates for a number of financial contracts and the prices of derivatives, it may be economically inefficient to use interest rates that include premiums which have risen due to a temporary surge in uncertainty. Thus, an expert judgment could be allowed to some extent in order to remove these premiums.

JEL Classifications
G11, G12

Reference Rate; Libor; Market Liquidity: Search Model; Robust Control.

This paper is based partly on Kobayashi, Nakamura, and Ohashi (2008). The author is grateful to the co-authors of that paper (Nobuhiro Nakamura [Hitotsubashi University] and Kazuhiko Ohashi [Hitotsubashi University]) for their advice. The author would also like to thank staff at the Bank of Japan, especially Kentaro Kikuchi, Azusa Takeyama, Kazuo Momma, Ko Nakayama, Hiromi Yamaoka, Yoshinori Nakata, and Kanako Saeki, for their helpful comments. The opinions expressed here, as well as any remaining errors, are those of the author and should not be ascribed to the Bank of Japan or the Financial Markets Department.

* Director, Financial Markets Department
E-mail : shun.kobayashi@boj.or.jp

Papers in the Bank of Japan Working Paper Series are circulated in order to stimulate discussion and comments. Views expressed are those of authors and do not necessarily reflect those of the Bank.
If you have any comment or question on the working paper series, please contact each author.
When making a copy or reproduction of the content for commercial purposes, please contact the Public Relations Department (post.prd8@boj.or.jp) at the Bank in advance to request permission. When making a copy or reproduction, the source, Bank of Japan Working Paper Series, should explicitly be credited.

distributed by
React to this article
Latest news
Date Title
09:37a DP WORLD : SCA signs deal with DP World for Ain Sokhna sea port development
09:32a SAMIR : Egyptian military helicopter crashes due to technical failure
09:26a LEWIS PHP 7HPF 7 1/2% CUM PRF STK #1 : In the land of Scrooge, a soft spot for Christmas ads
09:23a AGC NETWORKS : Sound thinking at heart of Dubai's Smart City philosophy
09:23a Statement by the Prime Minister of Canada on Holodomor Memorial Day
09:17a WESTFIELD : Village at Westfield Topanga gets its first Black Friday, and still has some free parking
08:49a ENERGY TRANSFER PARTNERS : Bakken pipeline hearing questions environmental impact of project
08:41a Prime Minister Announces Funding to Increase Opportunities for Youth In Africa
08:34a MICROSOFT : How to Turn on Windows 10's Find My Device Feature
08:31a JUVENTUS FOOTBALL CLUB : Napoli forward Higuain following in Maradona's footsteps
Latest news
Hot News 
OPPORTUNITY INVEST MGMT : 27 november 2015 - Announcement AGM on 22 december 2015
ATLANTIS RESOURCES : Tidal generating firm announces long partnership for investment by Gordon Calder
CYTOTOOLS : berichtet über Ergebnisse der europäischen klinischen Studie Phase III: Resultate der Behandlung des diabetischen Fußes mit DermaPro(R) bestätigen nicht die Ergebnisse der vorangegangenen Studien (DGAP News)
STOCK SPIRITS : Further Downgrades Earnings Guidance For 2015
IMAGINATION TECHNOLOGIES : Sir Hossein Yassaie receives 2015 Lifetime Achievement Award in annual Elektra European Electronics Industry Award...
Most Read News
11/27 RESEARCH AND MARKETS : Rotavirus Infections Therapeutic Development - Pipeline Review & Analysis, H2 2015
04:51a NIOC NATIONAL IRANIAN OIL : Iran’s Largest Oil Investement Event Opens
03:55a EUROPEAN COMMISSION : Antitrust: new Commission Guidelines on joint selling of olive oil, beef and veal, and arable crops
11/27 RESEARCH AND MARKETS : Acute Renal Failure (ARF) (Acute Kidney Injury) - Pipeline Review & Analysis, H2 2015
07:37a NIOC NATIONAL IRANIAN OIL : Iranian Oil Minister: IPC model Guarantees win-win Conditions
Most recommended articles
05:45aDJWill Black Friday Deals Give a Boost to Car Sales?
02:48aDJBrazil Plans Suit On Dam Breach, Toxins In River
02:48aDJToshiba Mulls Sale Of Chip-Unit Stake
02:47aDJBofA Executive Leaves Firm
12:26a CHINA CHENGTONG DEVELOPMENT : South Africa firms sign $930 million in deals ahead of Xi trip: Xinhua