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

News

Latest NewsCompaniesMarketsEconomy & ForexCommoditiesInterest RatesHot NewsMost Read NewsRecomm.Business LeadersCalendar 

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
Date Title
02:51a HONDA MOTOR : Asheboro woman survives car splitting in half
02:51a CANFOR PULP PRODUCTS : and Canfor Corporation Announce Annual General Meeting and First Quarter Results Conference Call
02:51a HENDERSON LAND DEVELOPMENT : Circular – Proposals for Issue of Bonus Shares, General Mandates to Buy Back Shares and to Issue Shares and Re-election of the Retiring Directors
02:51a HENDERSON LAND DEVELOPMENT : Sustainability and CSR Report 2016
02:50a UpSnap Announces Full Year and Q4 2016 Financial Results
02:49a UPSNAP : Announces Full Year and Q4 2016 Financial Results
02:47a ANCHOR BANCORP : quarterly profit rises to $702,000
02:47a SHAKE SHACK : releases new shakes to benefit No Kid Hungry
02:46a MURATA MANUFACTURING : introduces RF submodule for Wi-Fi
02:46a OXBRIDGE RE HOLDINGS LIMITED SETS FIRST QUARTER 2017 EARNINGS CALL FOR MAY 15, 2017 AT 4 : 30 p.m. ET
Latest news
Advertisement
Hot News 
19.50%Becton Dickinson to acquire Bard for $24 billion
10.73%GENERATION HEALTHCARE REIT : Canada's NorthWest offers to buy rest of Generation Healthcare
-4.44%WHAT'S NEWS : Business & Finance -- WSJ
5.90%Hasbro profit beats on gaming demand, shares hit record high
3.62%PHILIPS : Net Profit Leaps; Backs Full Year Guidance
Most Read News
06:54p T-Mobile open to merger talks, new subscribers top estimates
06:53p CANADIAN NATIONAL RAILWAY : CN Rail's revenue rises 8 pct on higher freight volumes
06:30p CANADIAN NATURAL RESOURCES : Inter Pipeline says Alberta crude oil leak came from its line
06:32p Fresenius snaps up Akorn, Merck KGaA's biosimilars in separate deals
06:39p Barrick Gold slashes Argentina mine output forecast after spill
Most recommended articles
04/21 TWENTY FIRST CENTURY FOX : Government extends period for regulators to report on Sky-Fox merger
04/17DJABBOTT LABORATORIES : Cyber Insurance Becomes a Must for More Manufacturers
08:29pDJPETER NICHOLAS : Trump Plans To Impose Tariff On Imports of Canadian Softwood Lumber -- 2nd Update
08:01p WILBUR ROSS : Ross
07:24p Labor shortage a stress test for Japan's 24/7 convenience stores