Benchmarking benchmarks

James Brugler, Marta Khomyn, Tālis Putniņs̆

Journal of Financial Economics · 2025 · Volume 168

DOI: 10.1016/j.jfineco.2025.104018

Abstract

Financial benchmarks such as LIBOR underpin the pricing of trillions of dollars of contracts around the world. We evaluate the quality of benchmark prices using a state-space model to separate information from noise. Applying the method to LIBOR benchmarks and their replacements, we find that alternative reference rates (ARRs) are less noisy in four of the five currencies. However, the USD ARR is considerably more noisy, resulting in billions of dollars of noise-related wealth transfers between contract counterparties. We show that benchmark reforms such as expanding the reference market and using a trimmed mean can reduce noise in ARRs.

Keywords

Benchmark prices, Information shares, Price discovery

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