The Fellowship of LIBOR: A Study of Spurious Interbank Correlations by the Method of Wigner-Ville Function

TL;DR

This paper investigates the presence of spurious correlations in LIBOR rates using a novel application of the Wigner-Ville function, aiming to detect manipulation and validate the randomness of submitted quotes.

Contribution

It introduces a new econometric approach based on the Wigner-Ville function from quantum mechanics to analyze financial time-series residuals for the first time.

Findings

Serial correlations inconsistent with true LIBOR submissions

Evidence of non-random patterns suggesting manipulation

Validation of the Wigner-Ville function as a tool for financial analysis

Abstract

The manipulation of LIBOR by a group of banks became one of the major blows to the remaining confidence in financial industry. Yet, despite an enormous amount of popular literature on the subject, rigorous time-series studies are few. In my paper, I discuss the following hypothesis. Namely, if we should assume for a statistical null, the quotes, which were submitted by the member banks were true, the deviations from the LIBOR should have been entirely random because they were determined by idiosyncratic conditions by the member banks. This hypothesis can be statistically verified. Serial correlations of the rates, which cannot be explained by the differences in credit qualities of the member banks or the domicile Governments, were subjected to correlation tests. A new econometric method--the analysis of the Wigner-Ville function borrowed from quantum mechanics and signal processing--is used and explained for the statistical interpretation of regression residuals.