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Cheap Talk and Strategic Rounding in Libor Submissions

Hernando-Veciana, Angel; Tröge, Michael

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Authors

Michael Tröge



Abstract

Interbanking rates were, until recently, based on judgmental estimates of borrowing costs. We interpret this as a cheap-talk game that allowed banks to communicate nonverifiable information about their opportunity cost to potential counterparties. Under normal market conditions there is a welfare maximizing equilibrium where banks truthfully disclose their borrowing cost, but, in times of financial stress, only “coarse” equilibria survive. We take this prediction to the data and show that banks round more frequently if the risk of the bank increases. Rounding is also more frequent for the more liquid short-term rates and certain benchmark maturities.

Citation

Hernando-Veciana, A., & Tröge, M. (2020). Cheap Talk and Strategic Rounding in Libor Submissions. The Review of Financial Studies, 33(6), 2585-2621. https://doi.org/10.1093/rfs/hhz101

Journal Article Type Article
Acceptance Date Jun 28, 2019
Online Publication Date Sep 9, 2019
Publication Date Jun 30, 2020
Deposit Date Jul 5, 2019
Publicly Available Date Sep 9, 2021
Journal Review of Financial Studies
Print ISSN 0893-9454
Electronic ISSN 1465-7368
Publisher Oxford University Press
Peer Reviewed Peer Reviewed
Volume 33
Issue 6
Pages 2585-2621
DOI https://doi.org/10.1093/rfs/hhz101
Public URL https://durham-repository.worktribe.com/output/1298243

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Copyright Statement
This is a pre-copyedited, author-produced PDF of an article accepted for publication in Review of financial studies following peer review. The version of record Hernando-Veciana, Angel & Tröge, Michael (2020). Cheap Talk and Strategic Rounding in Libor Submissions. Review of Financial Studies 33(6): 2585-2621 is available online at: https://doi.org/10.1093/rfs/hhz101





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