Log in
Login
Password
Remember
Forgot password ?
Become a member for free
Sign up
Sign up
Settings
Settings
Dynamic quotes 

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 : shun.kobayashi@boj.or.jp
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 (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
share with twitter share with LinkedIn share with facebook
share via e-mail
0
React to this article
Latest news
Date Title
01:55a CERNER : reports flatter-than-forecast new bookings
01:55a BATS GLOBAL MARKETS : doubled profit in first quarter
01:55a AMERICAN TRUCK SHOWROOMS : Gives 3 Reasons Why Truckers Support Donald Trump
01:55a DEADLINE TOMORROW : Lundin Law PC Announces Securities Class Action Lawsuit Against PTC Inc. And Reminds Investors With Losses To Contact The Firm
01:53a Japan lenders seen flagging gloomy year as negative rates depress loan income
01:52a TAKATA : Agrees to expansion of recalls
01:52a WEST AFRICAN RESOURCES : hits 6m at 9.2g/t Au from 15m at M1 South
01:51a MAGNACHIP SEMICONDUCTOR : posts 1Q profit
01:51a Digging for growth in China? Not quite yet, say excavator makers
01:51a Ad Hoc Group of GOL Noteholders Rejects GOL's Proposed Exchange Offer
Latest news
Advertisement
Hot News 
QGC SUBMISSION : Senate Select Committee on Unconventional Gas Mining
BANGO : Implements Google Play Direct Carrier Billing In India
FALANX GROUP LIMITED : Acquisition, Placing and issue of Loan Notes
FILTRONIC : New Contract Win
EMPRESARIA : Makes Good Start To 2016 With Net Fee Income Higher
Most Read News
06:18p FIBRA INN : Announces Monthly Report of Hotel Indicators for April 2016
06:18p Pomerantz Law Firm Announces the Filing of a Class Action against Intrexon Corporation and Certain Officers – XON
06:24p DREAM OFFICE REIT : Announces Voting Results for Election of Trustees
06:23p PHILIP RENAUD : Files Early Warning Report in Respect of Kane Biotech Inc.
07:24p Endo reports loss, announces layoffs, shake-up
Most recommended articles
05/03DJUBS Shares Drop As Profit Slumps
07:53p Japan lenders seen flagging gloomy year as negative rates depress loan income
07:51p Digging for growth in China? Not quite yet, say excavator makers
07:50p Hits to Americas oil output show global glut not invincible
07:41p Sanofi ready to up offer for drugmaker Medivation, could oust board