Premium
Bank Deposit Rate Clustering: Theory and Empirical Evidence
Author(s) -
Kahn Charles,
Pennacchi George,
Sopranzetti Ben
Publication year - 1999
Publication title -
the journal of finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 18.151
H-Index - 299
eISSN - 1540-6261
pISSN - 0022-1082
DOI - 10.1111/0022-1082.00185
Subject(s) - cluster analysis , set (abstract data type) , integer (computer science) , interest rate , empirical research , econometrics , economics , mathematics , monetary economics , computer science , statistics , programming language
Like security prices, retail deposit interest rates cluster around integers and “even” fractions. However, explanations for security price clustering are incompatible with deposit rate clustering. A theory based on the limited recall of retail depositors is proposed. It predicts that banks tend to set rates at integers and that rates are “sticky” at these levels. The propensity for integer rates increases with the level of wholesale interest rates and deposit market concentration. When banks set noninteger rates, rates are more likely to be just above, rather than just below, integers. The paper finds substantial empirical support for the theory's implications.