Abstract:

Using evidence from the Shanghai Interbank Offered Rate (SHIBOR), we show that some panel banks of an interbank offered rate system imitate peers' quotes after observing them on the next business day, which eventually leads to the predictability of the rate. To measure the strength of the imitation behavior, we construct a “Signed Active-minus-Stationary (SAmS)” Index, and show that the SAmS Index predicts SHIBOR changes. Moreover, the predictability of SHIBOR is not perceived and understood by the market. This causes the mispricing of SHIBOR-linked interest rate swaps, and, as a result, the excess returns of the interest rate swaps become predictable by the SAmS Index as well. Our findings suggest that the interest rate quotes can lose independence even without deliberate manipulation, which regulator should pay attention to in the supervision and reform of interest rate benchmarks.