Interest Rates and the Design of Financial Contracts / Michael R. Roberts, Michael Schwert.

Format:

Book

Author/Creator:

Roberts, Michael R.

Contributor:

National Bureau of Economic Research.

Schwert, Michael.

Series:

Working Paper Series (National Bureau of Economic Research) no. w27195.

NBER working paper series no. w27195

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2020.

Summary:

We show that the partial response of loan rates to interest rate changes, referred to in the bank lending literature as "stickiness," is a feature of perfect capital markets. No-arbitrage models of credit risk are able to replicate empirical interest rate sensitivities. However, the widespread use of interest rate floors in the low-rate environment of the last decade is a result of risk-sharing and incentive considerations arising from market imperfections. Floors reallocate cash flows across states in a way that loan spreads cannot. They insure lenders against losses if rates fall, while mitigating borrower moral hazard if rates rise.

Notes:

Print version record

May 2020.