Measuring Rents and Interest Rate Risk in Imperfect Financial Markets: The Case of Retail Bank Deposits

J. OF FINANCIAL AND QUANTITATIVE ANALYSIS, September 1996

Posted: 13 May 1998

See all articles by David E. Hutchison

David E. Hutchison

University of Illinois at Urbana-Champaign - Department of Accountancy

George Pennacchi

University of Illinois

Abstract

Traditional measures of interest rate risk assume that prices of financial assets and liabilities are set in perfectly competitive markets. However, evidence suggests that many retail financial markets do not follow the competitive paradigm. In this paper we employ a general contingent claims framework to value rents earned by banks in demandable retail deposit markets. Our analysis provides a natural and economically meaningful measure of interest rate risk for these imperfectly competitive markets. Using monthly survey data on NOW accounts and MMDAs, we estimate the value of retail deposit rents and deposit durations for over 200 commercial banks.

JEL Classification: G21

Suggested Citation

Hutchison, David E. and Pennacchi, George G., Measuring Rents and Interest Rate Risk in Imperfect Financial Markets: The Case of Retail Bank Deposits. J. OF FINANCIAL AND QUANTITATIVE ANALYSIS, September 1996, Available at SSRN: https://ssrn.com/abstract=7592

David E. Hutchison

University of Illinois at Urbana-Champaign - Department of Accountancy ( email )

1206 South Sixth Street
Champaign, IL 61820
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/

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