How Much Is WIRON Better Than WIBOR?

Abstract

Theoretical background: The transition from traditional interbank offered rates (IBORs) to more stable and reliable benchmark rates has become a focal point in the financial industry, particularly in the aftermath of the LIBOR scandal. We endeavour to apply theoretical considerations regarding proper benchmark rates within the context of WIBOR and WIRON rates on the Polish financial market. This study delves into the characteristics and effectiveness of both rates.

Purpose of the article: The purpose of this research is to evaluate WIRON against WIBOR across several key dimensions to determine which rate serves as a better benchmark for financial instruments in Poland. This com-parison is pivotal, as the chosen benchmark rate significantly impacts the valuation, risk, and performance of a wide array of financial products and contracts. It is hypothesized that WIRON fulfils more criteria of ideal refer-ence rate than WIBOR.

Research methods: Our methodology integrates a comprehensive qualitative and quantitative analysis, comparing WIBOR and WIRON against established criteria for a proper reference rate. This includes an examination of their verifiability, susceptibility to manipulation, daily calculation, independence from policy rates, resilience to market stress, avoidance of calendar effects, and representativeness of the underlying market. To delve deeper into the quantitative aspect, we will conduct numerical analysis and a comparison of quotations employing standard statistical indicators, as well as utilizing the Generalized Autoregressive Conditional Heteroskedasticity (GARCH) model.

Main findings: The findings indicate that WIRON potentially offers a more robust alternative to WIBOR, par-ticularly for overnight (ON) tenors. WIRON demonstrates a slightly better alignment with the principles of veri-fiability, resilience, and representativeness, attributed to its design that leverages actual transaction data. How-ever, both rates adequately meet the majority of the proper reference rate criteria, with unique advantages in different contexts. The study also observes that WIRON, while advantageous in specific aspects, does not deci-sively outperform WIBOR across all tenors and criteria. It particularly concerns the fact that WIBOR rates are an outcome of a market-based price formation process; they embed market participants’ expectations about future interest rates and market conditions. This nuanced evaluation underscores the complexity of selecting a singular benchmark rate that can effectively cater to the diverse needs of the financial market.