Libor at crossroads: stochastic switching detection using information theory quantifiers

TL;DR

This paper applies a novel information theory-based method to analyze Libor rates over 14 years, detecting abnormal stochastic regime changes around the 2007 financial crisis and the Libor scandal.

Contribution

It introduces the use of the Complexity-Entropy Causality Plane for financial market analysis, revealing regime shifts and market inefficiencies in Libor rates.

Findings

Detected abnormal Libor dynamics during the 2007 crisis

Identified reduction in market informational efficiency

Method can serve as a market watch tool

Abstract

This paper studies the 28 time series of Libor rates, classified in seven maturities and four currencies), during the last 14 years. The analysis was performed using a novel technique in financial economics: the Complexity-Entropy Causality Plane. This planar representation allows the discrimination of different stochastic and chaotic regimes. Using a temporal analysis based on moving windows, this paper unveals an abnormal movement of Libor time series arround the period of the 2007 financial crisis. This alteration in the stochastic dynamics of Libor is contemporary of what press called "Libor scandal", i.e. the manipulation of interest rates carried out by several prime banks. We argue that our methodology is suitable as a market watch mechanism, as it makes visible the temporal redution in informational efficiency of the market.