Abstract
We model the design of a benchmark fixing as an estimator of fair market value. The fixing data are the transactions of agents whose profits depend on the fixing, implying incentives for manipulation. We derive the optimal linear fixing under an assumption that transaction weights are unidimensional. We also axiomatically characterize the unique linear fixing that is robust to a certain form of collusion among traders. Our analysis provides a foundation for the commonly used volume-weighted average price (VWAP) and its analogue based on unidimensional weights. We characterize the relative advantages of these fixing designs, depending on market characteristics.
| Original language | English (US) |
|---|---|
| Pages (from-to) | 775-802 |
| Number of pages | 28 |
| Journal | Journal of Financial Economics |
| Volume | 142 |
| Issue number | 2 |
| DOIs | |
| State | Published - Nov 2021 |
Funding
We are grateful for useful discussions with members of the Market Participants Group on Reference Rate Reform (MPG). We have had particularly useful conversations with Matteo Aquilina, Terry Belton, Tim Bowler, David Bowman, Finbarr Hutchison, Paul Milgrom, Mohammad Morovati, Anthony Murphy, Holger Neuhaus, PierMario Satta, Roberto Schiavi, David Skeie, Andy Skrzypacz, Tom Steffen, Jeremy Stein, Kevin Stiroh, James Vickery, Zhe Wang, Victor Westrupp, Nate Wuerffel, Anthony Zhang, and Haoxiang Zhu. Two anonymous referees provided helpful feedback.
Keywords
- Collusion
- Financial benchmarks
- Manipulation
- Mechanism design without transfers
- Volume-weighted average price
ASJC Scopus subject areas
- Accounting
- Finance
- Economics and Econometrics
- Strategy and Management