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In Search of a Risk-Free Asset

Vladimir Yankov

Federal Reserve Board

March 28, 2014

To attract retail time deposits, over 7,000 FDIC insured U.S. commercial banks publicly post their yield offers. I document an economically sizable and highly pro-cyclical cross-sectional dispersion in these yield offers during the period 1997-2011. Banks adjusted their yields rigidly with median duration of 7 weeks in response to increasing or constant Fed Funds rate target regimes and 3 weeks during regimes of decreasing Fed Fund rate target. I investigate to what extent information (search) costs on the part of the investors in this market can explain the observed pricing behavior. I build and estimate an asset pricing model with heterogeneous search cost investors. A large fraction of high information cost uninformed investors and the exit of low information cost informed investors rationalizes the observed price dispersion. I further qualitatively match the asymmetric yield rigidity within the framework of costly consumer search without the need to impose menu costs or other restrictions on the banks' repricing behavior.

Number of Pages in PDF File: 50

Keywords: Consumer search, Price rigidity, Deposit rates, Interest rate pass-through

JEL Classification: D83, D91, G12, G21

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Date posted: April 23, 2012 ; Last revised: April 10, 2014

Suggested Citation

Yankov, Vladimir, In Search of a Risk-Free Asset (March 28, 2014). Available at SSRN: https://ssrn.com/abstract=2044882 or http://dx.doi.org/10.2139/ssrn.2044882

Contact Information

Vladimir Yankov (Contact Author)
Federal Reserve Board ( email )
20th & Constitution Ave. NW
Washington, DC 20551
United States
+1-202-912-7829 (Phone)
HOME PAGE: http://odalv.net
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