The Effects of the LIBOR Scandal on Volatility and Liquidity in LIBOR Futures Markets

In 2008, first suspicions arose that the London Interbank Offered Rate (LIBOR) had been systematically manipulated by financial institutions involved with its fixing; in June 2012, several major international banks officially admitted to this. The regulatory response could not have been stronger: the LIBOR was not just reformed but discontinued altogether. By studying 3-months LIBOR futures, this paper evaluates the consequences four scandal-related events have had on liquidity and volatility in LIBOR markets. The goal is to document the market disruption, or lack thereof, caused by the manipulation and discontinuation and to draw the relevant policy lessons. One finding is that the liquidity outflows necessitated by the discontinuation and the associated volatility increases were confined to a period of a few weeks before the discontinuation, easing the discontinuation’s critics’ concerns that market transitions of the scale of LIBOR could only be done at the cost of major and prolonged disruption.