A Test of the Law of One Price in Retail Banking

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A Test of the Law of One Price in Retail Banking

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ALFREDO MARTÍN-OLIVER
VICENTE SALAS-FUMÁS
JESUS SAURINA

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Alfredo Martin-Oliver

Abstract

This paper investigates the level and the determinants of retail banking interest rate differences among Spanish banks in the period 1989-2003. We find that the interest rates of twenty five different bank loan and deposit products adjust rather rapidly to their long-term values in response to external shocks, as the relative version of the Law of One Price predicts, but the evidence runs contrary to the absolute version of the Law. Credit risk premium, part of the marginal cost of the loans granted by a particular bank, is an important source of interest rate dispersion across banks and loan products, both before and after Spain joined the Euro zone. Therefore, differences in credit risk policies across banks must be taken into account when forming expectations about European retail banking integration. Copyright 2007 The Ohio State University.

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Article provided by Blackwell Publishing in its journal Journal of Money, Credit and Banking.

Volume (Year): 39 (2007)
Issue (Month): 8 (December)
Pages: 2021-2040
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Handle: RePEc:mcb:jmoncb:v:39:y:2007:i:8:p:2021-2040

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Paper
- Alfredo Martín-Oliver & Vicente Salas-Fumás & Jesús Saurina, 2005. "A test of the law of one price in retail banking," Banco de EspaÃ±a Working Papers 0530, Banco de España. [Downloadable!]

References listed on IDEAS
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

Juan Ayuso & Jorge Martínez, 2006. "Assessing banking competition: an application to the Spanish market for (quality-changing) deposits," Banco de EspaÃ±a Working Papers 0623, Banco de España. [Downloadable!]
Christoffer Kok Sørensen & Jung-Duk Lichtenberger, 2007. "Mortage interest rate dispersion in the euro area," Working Paper Series 733, European Central Bank. [Downloadable!]
Gabriel Jiménez & Javier Mencía, 2007. "Modeling the distribution of credit losses with observable and latent factors," Banco de EspaÃ±a Working Papers 0709, Banco de España. [Downloadable!]
Gabriel Jiménez & Jose A. Lopez & Jesús Saurina, 2007. "How does competition impact bank risk-taking?," Working Paper Series 2007-23, Federal Reserve Bank of San Francisco. [Downloadable!]
Francisco de Castro & Pablo Hernández de Cos, 2006. "The economic effects of exogenous fiscal shocks in Spain: a SVAR approach," Banco de EspaÃ±a Working Papers 0604, Banco de España. [Downloadable!]
Other versions:
- Francisco de Castro & Pablo Hernández de Cos, 2006. "The economic effects of exogenous fiscal shocks in Spain: a SVAR approach," Working Paper Series 647, European Central Bank. [Downloadable!]
Alfredo Martín-Oliver & Vicente Salas-Fumás & Jesús Saurina, 2008. "Search cost and price dispersion in vertically related markets: the case of bank loans and deposits," Banco de EspaÃ±a Working Papers 0825, Banco de España. [Downloadable!]
Luis Gutiérrez de Rozas, 2007. "Testing for competition in the Spanish banking industry: The Panzar-Rosse approach revisited," Banco de EspaÃ±a Working Papers 0726, Banco de España. [Downloadable!]

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