Clustered Pricing in the Corporate Loan Market: Theory and Empirical Evidence

Sajid Mukhtar Chaudhry, Elnaz Bajoori, Shasikanta Nandeibam

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Abstract

Existing theories explaining security price clustering as well as clustering in the retail deposit and mortgage markets are incompatible with the clustering in the corporate loan market. We develop a new theoretical model that the attitude of the lender toward the uncertainty about the quality of the borrower leads to the clustering of spreads. Our empirical results support our theoretical model and we find that clustering increases with the degree of uncertainty between the lender and the borrower. In contrast, clustering is less likely when the uncertainty about the quality of the borrower has been reduced through repeated access and through prior interactions of the lender and the borrower.
Original languageEnglish
Pages (from-to)275-296
Number of pages22
JournalJournal of Economic Behavior and Organization
Volume157
Early online date6 Jan 2018
DOIs
Publication statusPublished - 1 Jan 2019

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Keywords

  • corporate loans
  • interest rate clustering,
  • information asymmetry
  • uncertainty

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