In Search of a Risk-Free Asset

51 Pages Posted: 4 Jan 2015

See all articles by Vladimir Yankov

Vladimir Yankov

Board of Governors of the Federal Reserve System

Multiple version iconThere are 2 versions of this paper

Date Written: December 19, 2014

Abstract

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 and asymmetrically 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.

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

JEL Classification: D83, D91, G12, G21

Suggested Citation

Yankov, Vladimir, In Search of a Risk-Free Asset (December 19, 2014). FEDS Working Paper No. 2014-108, Available at SSRN: https://ssrn.com/abstract=2544640 or http://dx.doi.org/10.2139/ssrn.2544640

Vladimir Yankov (Contact Author)

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

Do you have negative results from your research you’d like to share?

Paper statistics

Downloads
227
Abstract Views
1,233
Rank
61,910
PlumX Metrics