How Much Is WIRON Better Than WIBOR?
How Much Is WIRON Better Than WIBOR?

Summary/Abstract: Theoretical background: The transition from traditional interbank offered rates (IBORs) to more stableand reliable benchmark rates has become a focal point in the financial industry, particularly in the aftermathof the LIBOR scandal. We endeavour to apply theoretical considerations regarding proper benchmark rateswithin the context of WIBOR and WIRON rates on the Polish financial market. This study delves into thecharacteristics and effectiveness of both rates.Purpose of the article: The purpose of this research is to evaluate WIRON against WIBOR across severalkey dimensions to determine which rate serves as a better benchmark for financial instruments in Poland.This comparison is pivotal, as the chosen benchmark rate significantly impacts the valuation, risk, andperformance of a wide array of financial products and contracts. It is hypothesized that WIRON fulfilsmore criteria of ideal reference 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 anexamination of their verifiability, susceptibility to manipulation, daily calculation, independence from policyrates, resilience to market stress, avoidance of calendar effects, and representativeness of the underlyingmarket. To delve deeper into the quantitative aspect, we will conduct numerical analysis and a comparisonof quotations employing standard statistical indicators, as well as utilizing the Generalized AutoregressiveConditional Heteroskedasticity (GARCH) model. Main findings: The findings indicate that WIRON potentially offers a more robust alternative to WIBOR,particularly for overnight (ON) tenors. WIRON demonstrates a slightly better alignment with the principlesof verifiability, resilience, and representativeness, attributed to its design that leverages actual transactiondata. However, both rates adequately meet the majority of the proper reference rate criteria, with uniqueadvantages in different contexts. The study also observes that WIRON, while advantageous in specificaspects, does not decisively outperform WIBOR across all tenors and criteria. It particularly concernsthe fact that WIBOR rates are an outcome of a market-based price formation process; they embed marketparticipants’ expectations about future interest rates and market conditions. This nuanced evaluation un-derscores the complexity of selecting a singular benchmark rate that can effectively cater to the diverseneeds of the financial market.

• Details
• Contents