Robust Benchmark Design
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).
We are grateful for useful discussions with members of the Market Participants Group on Reference Rate Reform (MPG). We have had particularly useful conversations with Matteo Aquilina, Terry Belton, David Bowman, Finbarr Hutchison, Paul Milgrom, Anthony Murphy, Holger Neuhaus, PierMario Satta, Roberto Schiavi, David Skeie, Andy Skrzypacz, Tom Steffen, Jeremy Stein, Kevin Stiroh, James Vickery, Zhe Wang, Victor Westrupp, and Haoxiang Zhu. The results and opinions expressed in this paper are not necessarily those of the Market Participants Group on Reference Rate Reform, a committee chaired by Duffie that was established by the Financial Stability Board and that published its final report in 2014, nor do they necessarily reflect the views of the National Bureau of Economic Research.
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Econometrica, 1990 to present.
Review of Finance, 1995 to present.
Journal of Computational Finance, 1997 to present.
Advances in Mathematical Economics, 1998 to present.
Journal of Financial Economics, 2001 to present.
Mathematics and Financial Economics, 2007 to present.
AEJ: Microeconomics, 2007 to present.
International Journal of Central Banking, 2009 to present.
Stochastic Systems, 2009 to present.
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Econometric Society, Fellow and Member of Council.
National Bureau of Economic Research, Research Associate.
NCCR FinRisk, International Scientific Council, Switzerland.
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Chicago Mercantile Exchange-Mathematical Sciences Research Institute, Prize Committee.
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Pacific Institute of Mathematical Sciences, Board of Directors.
Working Group on Global Markets, Stanford University.
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Hausdorff Research Institute for Mathematics, University of Bonn, Stochastic Dynamics in Economics and Finance, Advisory Board.
Swiss Finance Institute, Scientific Council.
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