TY - JOUR
T1 - Robust benchmark design
AU - Duffie, Darrell
AU - Dworczak, Piotr
N1 - Funding Information:
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.
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 -