LIBOR troubles: anomalous movements detection based on Maximum Entropy

TL;DR

This paper introduces a Maximum Entropy-based forecasting method to detect anomalous LIBOR movements, aiding market surveillance and identifying unfair bank behaviors during the 2007-2009 period.

Contribution

It presents a novel application of Maximum Entropy principles for detecting LIBOR manipulation, enhancing surveillance capabilities.

Findings

Robust detection of anomalous LIBOR movements

Effective identification of unfair bank submissions

Method remains stable across parameter variations

Abstract

According to the definition of the London Interbank Offered Rate (LIBOR), contributing banks should give fair estimates of their own borrowing costs in the interbank market. Between 2007 and 2009, several banks made inappropriate submissions of LIBOR, sometimes motivated by profit-seeking from their trading positions. In 2012, several newspapers' articles began to cast doubt on LIBOR integrity, leading surveillance authorities to conduct investigations on banks' behavior. Such procedures resulted in severe fines imposed to involved banks, who recognized their financial inappropriate conduct. In this paper, we uncover such unfair behavior by using a forecasting method based on the Maximum Entropy principle. Our results are robust against changes in parameter settings and could be of great help for market surveillance.