LIBOR Manipulation and the Transition to SOFR

With the London Interbank Offer Rate (LIBOR) likely to disappear at the end of 2021 due to its manipulation during the 2008 financial crisis, the financial industry must decide what to do about legacy contracts tied to LIBOR and must select a new interest rank benchmark regime going forwards. This paper provides insight into those questions by first contributing to the existing literature aimed at measuring the extent of LIBOR manipulation and then by developing a model to explain the LIBOR-SOFR spread. This paper analyzes banks’ LIBOR submissions from 2006 to 2008 to identify bank collusion to strategically increase or decrease LIBOR to benefit their traders with LIBOR exposure. It then uses macro-economic data to show that LIBOR and SOFR diverge during periods of financial turmoil, and on the basis of these results makes a recommendation for how the financial industry should transition from LIBOR