Cheap Talk and Strategic Rounding in Libor Submissions

Hernando-Veciana, Angel; Tröge, Michael

Abstract

Interbanking rates were, until recently, based on judgmental estimates of borrowing costs. We interpret this as a cheap-talk game that allowed banks to communicate nonverifiable information about their opportunity cost to potential counterparties. Under normal market conditions there is a welfare maximizing equilibrium where banks truthfully disclose their borrowing cost, but, in times of financial stress, only “coarse” equilibria survive. We take this prediction to the data and show that banks round more frequently if the risk of the bank increases. Rounding is also more frequent for the more liquid short-term rates and certain benchmark maturities.

Citation

Hernando-Veciana, A., & Tröge, M. (2020). Cheap Talk and Strategic Rounding in Libor Submissions. The Review of Financial Studies, 33(6), 2585-2621. https://doi.org/10.1093/rfs/hhz101

• Journal Article Type: Article
• Acceptance Date: Jun 28, 2019
• Online Publication Date: Sep 9, 2019
• Publication Date: Jun 30, 2020
• Deposit Date: Jul 5, 2019
• Publicly Available Date: Sep 9, 2021
• Journal: Review of Financial Studies
• Print ISSN: 0893-9454
• Electronic ISSN: 1465-7368
• Publisher: Oxford University Press
• Peer Reviewed: Peer Reviewed
• Volume: 33
• Issue: 6
• Pages: 2585-2621
• DOI: https://doi.org/10.1093/rfs/hhz101
• Public URL: https://durham-repository.worktribe.com/output/1298243