Log in
E-mail
Password
Remember
Forgot password ?
Become a member for free
Sign up
Sign up
Settings
Settings
Dynamic quotes 
OFFON

4-Traders Homepage  >  News  >  Economy & Forex  >  All News

News : Economy & Forex

Latest NewsCompaniesMarketsEconomy & ForexCommoditiesInterest RatesBusiness LeadersFinance ProfessionalsCalendarSectors 
All NewsEconomyCurrencies / ForexCryptocurrenciesEconomic EventsPress releases

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

share with twitter share with LinkedIn share with facebook
share via e-mail
0
12/28/2012 | 08:06am CEST

: Actual Transactions and Expert Judgment

December 28, 2012
Shun Kobayashi*

Abstract

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

Keywords
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 : [email protected]
Notice

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 ([email protected]) 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
share with twitter share with LinkedIn share with facebook
share via e-mail
0
Latest news "Economy & Forex"
04:36pIndustrials Up, But Not By Much, as Tariff Worries Linger - Industrials Roundup
DJ
04:35pOil jumps as OPEC agrees to modest output hikes
RE
04:35pQuebec sees 2017-2018 surplus nearly tripling on strong economy
RE
04:33pSONOMA COUNTY CA : County of Sonoma Encourages Residents and Visitors to be Prepared for First Red Flag Warning of the Fire Season
PU
04:33pTHIS WEEK IN TRUMP’S SWAMP : Insider Trading, Pruitt’s Pants, And More Wasted Taxpayer Dollars
PU
04:28pELMWOOD VILLAGE ASSOCIATION : Jewish Community Center- 787 Delaware
PU
04:28pDONNA OBERLANDER : Oberlander Says Nearly $1 Million in Fees to Help Pay for Marcellus Drilling Impacts
PU
04:25pMaterials Up as Trade-War Fears Subside - Materials Roundup
DJ
04:23pEUROPEAN UNION : Main topics and media events 25 June - 8 July 2018
PU
04:23pEnergy Up After OPEC Meeting -- Energy Roundup
DJ
Latest news "Economy & Forex"
Advertisement