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Two-Sided Matching and Spread Determinants in the Loan Market

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Author Info
Jiawei Chen () (Department of Economics, University of California-Irvine)
Abstract

Empirical work on bank loans typically regresses loan spreads (markups of loan interest rates over a benchmark rate) on observed characteristics of banks, firms, and loans. The estimation is problematic when some of these characteristics are only partially observed and the matching of banks and firms is endogenously determined because they prefer partners that have higher quality. We study the U.S. bank loan market with a two-sided matching model to control for the endogenous matching, and obtain Bayesian inference using a Gibbs sampling algorithm with data augmentation. We find evidence of positive assortative matching of sizes, explained by similar relationships between quality and size on both sides of the market. Banks' risk and firms' risk are important factors in their quality. Controlling for the endogenous matching has a strong impact on estimated coefficients in the loan spread equation.

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Paper provided by University of California-Irvine, Department of Economics in its series Working Papers with number 060702.

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Length: 39 pages
Date of creation: Aug 2006
Date of revision:
Handle: RePEc:irv:wpaper:060702

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Related research
Keywords: Two-sided matching; Loan spread; Bayesian inference; Gibbs sampling with data augmentation;

Find related papers by JEL classification:
C11 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: General - - - Bayesian Analysis
C78 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Bargaining Theory; Matching Theory
G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Mortgages
L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms

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