A permutation Information Theory tour through different interest rate maturities: the Libor case

TL;DR

This study applies permutation-based Information Theory measures to analyze Libor interest rates across multiple currencies and maturities, detecting anomalies likely linked to manipulation during 2006-2012.

Contribution

It introduces a novel application of permutation Shannon entropy and Fisher information to monitor interest rate behaviors and identify irregularities in Libor.

Findings

Anomalous Libor behavior detected in multiple currencies during 2006-2012

Severe stochastic switches observed in short-term maturities

Methodology suggests potential as a market oversight tool

Abstract

This paper analyzes Libor interest rates for seven different maturities and referred to operations in British Pounds, Euro, Swiss Francs and Japanese Yen, during the period years 2001 to 2015. The analysis is performed by means of two quantifiers derived from Information Theory: the permutation Shannon entropy and the permutation Fisher information measure. An anomalous behavior in the Libor is detected in all currencies except Euro during the years 2006--2012. The stochastic switch is more severe in 1, 2 and 3 months maturities. Given the special mechanism of Libor setting, we conjecture that the behavior could have been produced by the manipulation that was uncovered by financial authorities. We argue that our methodology is pertinent as a market overseeing instrument.