TY - JOUR
T1 - Robust benchmark design
AU - Duffie, Darrell
AU - Dworczak, Piotr
N1 - Funding Information:
This work has been supported by Ministry of Science, Education and Sport, Republic of Croatia (Project No. 098-1782739-2749) and Croatian Science Foundation (Project No. BIOTA UIP-11-2013-6433).
Publisher Copyright:
© 2021 Elsevier B.V.
PY - 2021/11
Y1 - 2021/11
N2 - 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.
AB - 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.
KW - Collusion
KW - Financial benchmarks
KW - Manipulation
KW - Mechanism design without transfers
KW - Volume-weighted average price
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U2 - 10.1016/j.jfineco.2021.06.024
DO - 10.1016/j.jfineco.2021.06.024
M3 - Article
AN - SCOPUS:85111031596
VL - 142
SP - 775
EP - 802
JO - Journal of Financial Economics
JF - Journal of Financial Economics
SN - 0304-405X
IS - 2
ER -