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The London Interbank Offered Rate (LIBOR) is an indicative average interest rate at which a selection of banks (the panel banks) are prepared to lend one another unsecured funds on the London money market.

LIBOR is currently calculated for 5 different currencies, including the USD. If LIBOR denominated in USD is calculated based on London based banks, is it still a good short term interest rate measure for the U.S.?

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It depends on the purpose for which you want to use LIBOR. If you want to use it as a measure of risk free rate, then it is not a good idea, because it included premiums for interbank lending credit risk and liquidity risk. You should use the rate on short term US treasuries for risk free rate (again it depends on the duration of your model). You can also check out Federal Funds rate and how it relates to LIBOR (LIBOR-OIS Spread) to get a better feel for what interest rate you would need.

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Yes, in general it is. If you take a look at the banks that contribute to the Libor you'll see why:

  • Bank of America
  • Bank of Tokyo-Mitsubishi UFJ
  • Barclays Bank
  • BNP Paribas
  • Citibank NA
  • Credit Agricole CIB
  • Credit Suisse
  • Deutsche Bank
  • HSBC
  • JP Morgan Chase
  • Lloyds Banking Group
  • Rabobank
  • Royal Bank of Canada
  • Société Générale
  • Sumitomo Mitsui Banking Corporation Europe Ltd
  • Norinchukin Bank
  • Royal Bank of Scotland
  • UBS AG

It consists not only of british banks, but of banks from all over the world. It does well as an approximation for the short term interest rate, since lending to other banks is relatively low in risk and therefore corresponds to a lower interest.

But, as Sason already mentioned, I would not use it as a risk free rate.

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