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Robust Benchmark Design

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  • Darrell Duffie
  • Piotr Dworczak

Abstract

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).

Suggested Citation

  • Darrell Duffie & Piotr Dworczak, 2014. "Robust Benchmark Design," NBER Working Papers 20540, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:20540
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    References listed on IDEAS

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    1. Duffie, Darrell & Dworczak, Piotr, 2021. "Robust benchmark design," Journal of Financial Economics, Elsevier, vol. 142(2), pages 775-802.
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    9. Carol Osler, 2016. "Dealer Trading at the Fix," Working Papers 101, Brandeis University, Department of Economics and International Business School.
    10. Darrell Duffie & Jeremy C. Stein, 2015. "Reforming LIBOR and Other Financial Market Benchmarks," Journal of Economic Perspectives, American Economic Association, vol. 29(2), pages 191-212, Spring.
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    Cited by:

    1. Victor Olkhov, 2021. "Three Remarks On Asset Pricing," Papers 2105.13903, arXiv.org, revised Jan 2024.
    2. Victor Olkhov, 2023. "Market-Based Probability of Stock Returns," Papers 2302.07935, arXiv.org, revised Feb 2024.
    3. Zhang, Anthony Lee, 2022. "Competition and manipulation in derivative contract markets," Journal of Financial Economics, Elsevier, vol. 144(2), pages 396-413.
    4. Markus Baldauf & Christoph Frei & Joshua Mollner, 2022. "Principal Trading Arrangements: When Are Common Contracts Optimal?," Management Science, INFORMS, vol. 68(4), pages 3112-3128, April.
    5. Duffie, Darrell & Dworczak, Piotr, 2021. "Robust benchmark design," Journal of Financial Economics, Elsevier, vol. 142(2), pages 775-802.
    6. Victor Olkhov, 2022. "Market-Based Asset Price Probability," Papers 2205.07256, arXiv.org, revised Feb 2024.
    7. Kirti, Divya, 2022. "What are reference rates for?," Journal of Banking & Finance, Elsevier, vol. 144(C).
    8. Chukwudi Henry Dike, 2020. "Strategic Interactions in Financial Networks," 2020 Papers pdi579, Job Market Papers.
    9. Eric Budish & Robin S. Lee & John J. Shim, 2024. "A Theory of Stock Exchange Competition and Innovation: Will the Market Fix the Market?," Journal of Political Economy, University of Chicago Press, vol. 132(4), pages 1209-1246.
    10. Li, Ming & Sun, Hang & Zong, Jichuan, 2021. "Intertemporal imitation behavior of interbank offered rate submissions," Journal of Banking & Finance, Elsevier, vol. 132(C).
    11. Darrell Duffie & Jeremy C. Stein, 2015. "Reforming LIBOR and Other Financial Market Benchmarks," Journal of Economic Perspectives, American Economic Association, vol. 29(2), pages 191-212, Spring.
    12. Muto, Ichiro, 2017. "The role of the reference rate in an interbank market with imperfect information," Global Finance Journal, Elsevier, vol. 34(C), pages 16-31.
    13. Antje Berndt & Darrell Duffie & Yichao Zhu, 2023. "Across‐the‐Curve Credit Spread Indices," Financial Markets, Institutions & Instruments, John Wiley & Sons, vol. 32(3), pages 115-130, August.
    14. Victor Olkhov, 2021. "Theoretical Economics and the Second-Order Economic Theory. What is it?," Papers 2112.04566, arXiv.org, revised Mar 2024.
    15. Alex Frankel & Navin Kartik, 2022. "Improving Information from Manipulable Data," Journal of the European Economic Association, European Economic Association, vol. 20(1), pages 79-115.
    16. Frei, Christoph & Mitra, Joshua, 2021. "Optimal closing benchmarks," Finance Research Letters, Elsevier, vol. 40(C).
    17. Aquilina, Matteo & Ibikunle, Gbenga & Mollica, Vito & Steffen, Tom, 2022. "The visible hand: benchmarks, regulation, and liquidity," Journal of Financial Markets, Elsevier, vol. 61(C).
    18. Gong, Aibo & Ke, Shaowei & Qiu, Yawen & Shen, Rui, 2022. "Robust pricing under strategic trading," Journal of Economic Theory, Elsevier, vol. 199(C).
    19. Antje Berndt & Darrell Duffie & Yichao Zhu, 2023. "Across‐the‐Curve Credit Spread Indices," Financial Markets, Institutions & Instruments, John Wiley & Sons, vol. 32(3), pages 115-130, August.
    20. Ahmed Baig & Drew B. Winters, 2022. "The search for a new reference rate," Review of Quantitative Finance and Accounting, Springer, vol. 58(3), pages 939-976, April.
    21. Benenchia, Matteo & Galati, Luca & Lepone, Andrew, 2024. "To fix or not to fix: The representativeness of the WM/R methodology that underpins the FX benchmark rates. A pre-registered report," Pacific-Basin Finance Journal, Elsevier, vol. 84(C).
    22. Darrell Duffie & Jeremy C. Stein, 2015. "Reforming LIBOR and Other Financial Market Benchmarks," Journal of Economic Perspectives, American Economic Association, vol. 29(2), pages 191-212, Spring.
    23. Chen, Jiakai, 2021. "LIBOR's poker," Journal of Financial Markets, Elsevier, vol. 55(C).
    24. Brian Coulter & Joel Shapiro & Peter Zimmerman, 2018. "A Mechanism for LIBOR [Optimal selling strategies under uncertainty for a discriminating monopolist when demands are interdependent]," Review of Finance, European Finance Association, vol. 22(2), pages 491-520.

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    More about this item

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors

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