Benchmarking benchmarks
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2025-06-01
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Journal of Financial Economics
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Elsevier BV
Melbourne Authors
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Finance
School of Agriculture, Food and Ecosystem Sciences
School of Agriculture, Food and Ecosystem Sciences
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Conference Paper
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Brugler, J., Khomyn, M. & Putniņs̆, T. (2025). Benchmarking benchmarks. Journal of Financial Economics, 168, pp.104018-104018. Elsevier BV. https://doi.org/10.1016/j.jfineco.2025.104018.
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Abstract
Financial benchmarks such as LIBOR underpin the pricing of trillions of dollars of contracts around the world. We evaluate the quality of benchmark prices using a state-space model to separate information from noise. Applying the method to LIBOR benchmarks and their replacements, we find that alternative reference rates (ARRs) are less noisy in four of the five currencies. However, the USD ARR is considerably more noisy, resulting in billions of dollars of noise-related wealth transfers between contract counterparties. We show that benchmark reforms such as expanding the reference market and using a trimmed mean can reduce noise in ARRs.