Clustered Pricing in the Corporate Loan Market: Theory and Empirical Evidence

Research output: Contribution to journalArticlepeer-review

Authors

External organisations

  • University of Bath

Abstract

Existing theories explaining security price clustering as well as clustering in the retail deposit and mortgage markets are incompatible with the clustering in the corporate loan market. We develop a new theoretical model that the attitude of the lender toward the uncertainty about the quality of the borrower leads to the clustering of spreads. Our empirical results support our theoretical model and we find that clustering increases with the degree of uncertainty between the lender and the borrower. In contrast, clustering is less likely when the uncertainty about
the quality of the borrower has been reduced through repeated access and through prior interactions of the lender and the borrower.

Details

Original languageEnglish
JournalJournal of Economic Behavior & Organization
Early online date6 Jan 2018
Publication statusE-pub ahead of print - 6 Jan 2018

Keywords

  • corporate loans , interest rate clustering , information asymmetry , uncertainty