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

Existing theories explaining security price clustering as well as clustering in the retail depositand mortgage markets are incompatible with the clustering in the corporate loan market. Wedevelop a new theoretical argument that the attitude of the lender toward the uncertaintyabout the quality of the borrower leads to the clustering of spreads. Our empirical resultssupport these arguments and we find that clustering increases with the degree of uncertaintybetween the lender and the borrower. In contrast, clustering is less likely when the uncertaintyabout the quality of the borrower has been reduced through repeated access and through priorinteractions of the lender and the borrower.