Bank Deposit Rate Clustering: Theory and Empirical Evidence

32 Pages Posted: 17 Jan 2015

See all articles by Charles M. Kahn

Charles M. Kahn

University of Illinois, Urbana-Champaign; Bank of Canada; Feseral Reserve Bank of Saint Louis

George Pennacchi

University of Illinois

Ben J. Sopranzetti

Rutgers, The State University of New Jersey - New Brunswick/Piscataway

Date Written: July 1, 1996

Abstract

The market prices of stocks and other assets tend to cluster on round fractions. A similar clustering is found in the interest rates paid on retail bank deposits. However, the theoretical rationales given for asset-price clustering are incompatible with the clustering of retail deposit rates. This paper proposes a theory based on depositors limited recall. It shows that when banks exploit this phenomenon, deposit rates will tend to be set at round fractions and will be relatively sticky at these levels. The implications of this theoretical model are tested using money market deposit account and retail certificate of deposit interest-rate data from a sample of more than 500 banks.

Suggested Citation

Kahn, Charles M. and Pennacchi, George G. and Sopranzetti, Ben J., Bank Deposit Rate Clustering: Theory and Empirical Evidence (July 1, 1996). FRB of Cleveland Working Paper No. 9604, Available at SSRN: https://ssrn.com/abstract=2550306 or http://dx.doi.org/10.2139/ssrn.2550306

Charles M. Kahn

University of Illinois, Urbana-Champaign ( email )

Department of Finance
340 Wohlers Hall
Champaign, IL 61820
United States

HOME PAGE: http://kahnfrance.com/cmk/

Bank of Canada

234 Wellington Street
Ontario, Ottawa K1A 0G9
Canada

Feseral Reserve Bank of Saint Louis

411 Locust St
Saint Louis, MO 63011
United States

George G. Pennacchi (Contact Author)

University of Illinois ( email )

4041 BIF, Box 25
515 East Gregory Drive
Champaign, IL 61820
United States
217-244-0952 (Phone)

HOME PAGE: http://www.business.illinois.edu/gpennacc/

Ben J. Sopranzetti

Rutgers, The State University of New Jersey - New Brunswick/Piscataway ( email )

94 Rockafeller Road
New Brunswick, NJ 08901
United States

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