A re-examination of Libor rigging: a time-varying cointegration perspective
Using a time-varying cointegration framework, this paper examines the alleged manipulation of the London interbank offered rate (Libor) during the 2007-2009 financial crisis. The aberration in the estimated values of the cointegrating and error correction parameters governing the long-run equilibrium relationship between bank quotes and the final Libor suggests banks are submitting lower quotes. Further analysis which controls for an individual bank's credit risk, market wide credit and liquidity risks, and a common market factor, demonstrate possible evidence of Libor rigging during crisis period. Bank quotes are found to be poor indicators of their financing costs in crisis period.
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