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

Published online by Cambridge University Press:  06 April 2009

David E. Hutchison  and
George G. Pennacchi
David E. Hutchison
Affiliation:
Department of Finance, Grand Valley State University, Allendale, MI 49401
George G. Pennacchi
Affiliation:
Department of Finance, University of Illinois, Urbana, IL 61801
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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 more than 200 commercial banks.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 31 , Issue 3 , September 1996 , pp. 399 - 417
Copyright
Copyright © School of Business Administration, University of Washington 1996

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