The (in)visible hand in the Libor market: an Information Theory approach

TL;DR

This paper employs an innovative information theory method to analyze UK interest rate time series, detecting anomalies in Libor that may indicate data manipulation, especially during the 2008 financial crisis.

Contribution

It introduces the use of the complexity-entropy causality plane to identify stochastic and chaotic regimes in financial time series, revealing potential manipulation in Libor.

Findings

Anomalous Libor behavior detected around the 2008 crisis

The method classifies different stochastic regimes in interest rates

Potential evidence of data manipulation in Libor during critical periods

Abstract

This paper analyzes several interest rates time series from the United Kingdom during the period 1999 to 2014. The analysis is carried out using a pioneering statistical tool in the financial literature: the complexity-entropy causality plane. This representation is able to classify different stochastic and chaotic regimes in time series. We use sliding temporal windows to assess changes in the intrinsic stochastic dynamics of the time series. Anomalous behavior in the Libor is detected, especially around the time of the last financial crisis, that could be consistent with data manipulation.