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London Interbank Bid Rate Definition
The London Interbank Bid Rate (Libid) is the amount of interest London banks are willing to pay on money borrowed from other banks while the London Interbank Offered Rate (Libor) is the amount of interest charged by a bank on money it lends to other banks. Libor is calculated and published by Intercontinental exchange and used only on the interbank lending market. Limean is the average of Libor and Libid.
A Little More on What is the London Interbank Bid Rate (LIBID)
LIBOR is the amount of interest charged by a bank on money it lends to other banks in a specific currency for a certain amount of time. Although, there are actually 35 rates issued every day, the standard rates is calculated for five currencies, the Swiss Franc, the Euro, the Pound Sterling, the US dollar and the Japanese Yen. The ICE Benchmark Administration (IBA) is responsible for fixing and issuing the Libor while the Libid, though also issued daily has no such correspondent.
For a variety of global financial instruments such as short term futures contracts, forward rate agreements, interest rate swaps and currency options, the Libor and Libid are used as the most important reference rates. As a key driver in the Eurodollar market, it serves as the basis for banks’ retail products and is derived from a filtered average of the rates charged for institutional loans with different maturity periods.
References London Interbank Bid Rate
Academic Research on What is the London Interbank BID (LIBID) rate
The effect of the term auction facility on the London interbank offered rate, McAndrews, J., Sarkar, A., & Wang, Z. (2017). Journal of Banking & Finance, 83, 135-152. With the aim of improving conditions in the dollar money market and reducing Libor, the Term Auction Facility (TAF) was introduced during the global financial crisis. The work discusses the disagreements on the effect of the TAF on Libor which arose from the mis-specifications of econometric models, also coming to the conclusion that despite issues, the TAF is able to relieve liquidity strains in the interbank market.
The London Interbank Offered Rate (LIBOR) and UK construction industry output 1990-2008, Bickerton, M., & Louis Gruneberg, S. (2013). Journal of Financial Management of Property and Construction, 18(3), 268-281 This study aimed at determining if the Libor could be used to influence construction output by investigating the relationship between them as a result of the fact that developers and contractors borrow from banks to finance construction. The effectiveness of this ingenious tool is necessary for understanding the role of the central bank in financial stability.
The business transformation and enterprise architecture framework The London Interbank offered rate crisis-the model, Trad, A., & Kalpić, D. (2017). The Business & Management Review, 9(2), 67-76. Financial budgeting and credit controls are a set of interrelated activities that touch various domains and also encourage an entity’s growth and integration. Due to the financial crisis that was experienced within the last decade, an analysis of Libor as a model for predicting budgeting and crediting processes are carried out in this article.
Monetary Transmission: The Federal Funds Rate and the London Interbank Offered Rate (LIBOR), Friedman, J., & Shachmurove, Y. (2017). Journal of Finance and Economics, 5(1), 01-08. This paper examines how effective a transmission from the federal funds rate to Libor would be.
Tracking the Libor rate, Abrantes-Metz, R. M., Villas-Boas, S. B., & Judge, G. (2011). Applied Economics Letters, 18(10), 893-899. This paper employs the use of Benford’s law to track Libor over the period 2005-2008 and raises some concerns about the usefulness of Libor as a major economic indicator.
Interbank rate fixings during the recent turmoil, Gyntelberg, J., & Wooldridge, P. (2008). The interbank market crisis in the second half of 2007 brought into question the strength of rate fixings. Although they were able to regulate the influence of strategic behavior and changing perceptions of credit quality, they diverged to some extent in comparison with others.
Long-range dependence and multifractality in the term structure of LIBOR interest rates, Cajueiro, D. O., & Tabak, B. M. (2007). Physica A: Statistical Mechanics and its Applications, 373, 603-614. This is a study of data set from 2000 to 2005 for six different currencies and various maturities showing long range dependence in Libor interest rates. The paper also suggests the need for interest derivatives to take into account the multifractality of some markets.
Does the LIBOR reflect banks’ borrowing costs?, Snider, C. A., & Youle, T. (2010). The paper examines the two types of evidence that suggest that the Libor may not accurately show average bank borrowing costs which is its supposed target. It also asserts that the large portfolio exposure of several banks to the Libor may be the source of misreporting incentives.
Mean reversion and volatility of short-term London interbank offer rates: An empirical comparison of competing models, Adkins, L. C., & Krehbiel, T. (1999). International review of economics & finance, 8(1), 45-54. Using the Euler-Maruyama discrete-time approximation, the authors of this paper investigate the properties of several stochastic processes fitted to London Interbank Offer Rates over a 3 and 6 month period.
LIBOR: origins, economics, crisis, scandal, and reform, Hou, D., & Skeie, D. R. (2014). The volatility of the Libor during the financial crisis raised questions of credibility while the uncovering of several misconducts has led to the need for reforms.
An evaluation of multi-factor CIR models using LIBOR, swap rates, and cap and swaption prices, Jagannathan, R., Kaplin, A., & Sun, S. (2003). Journal of Econometrics, 116(1-2), 113-146. An evaluation of the classical Cox, Ingersoll and Ross (1985) (CIR) model using data on Libor is attempted in this journal. As a result of some problems with the model, there is a need to evaluate term structure models using data on derivative prices.
What’s in a number? The importance of LIBOR, MacKenzie, D. (2008). University of Edinburgh, Real-World Economics Review, 47(47), 237-242. The article is based on the importance of Libor as a critical part of the infrastructure of financial markets. It also gives a description of how Libor is calculated.