Board of Governors of the Federal Reserve System (US)
Finance and Economics Discussion Series
In Search of a Risk-free Asset
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.
Cite this item
Vladimir Yankov, In Search of a Risk-free Asset, Board of Governors of the Federal Reserve System (US), Finance and Economics Discussion Series 2014-108, 02 Aug 2014.
- D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
- D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making
- G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
- G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
Keywords: Consumer search; deposit rates; interest rate pass-through; price rigidity
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