BoJ paper finds noisy reference rate can create volatility

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A working paper, published by the Bank of Japan (BoJ) today (December 10) examines reference rates such as Libor in an attempt to determine their effect on the stability of interbank markets.

Author Ichiro Muto builds a model assuming banks cannot fully identify the nature of shocks affecting individual transactions, leading to ‘noise' in reported interest rates. Where noise is limited to individual transactions, the paper finds increasing the number of reports helps to reduce volatility and

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