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Board of Governors of the Federal Reserve System (US)
Finance and Economics Discussion Series
In Search of a Risk-free Asset
Vladimir Yankov
Abstract

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.


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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.
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Keywords: Consumer search; deposit rates; interest rate pass-through; price rigidity
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