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Divergent interest rates in the theory of financial markets

Lutz Kruschwitz, Andreas Löffler and Daniela Lorenz

The Quarterly Review of Economics and Finance, 2019, vol. 71, issue C, 48-55

Abstract: We extend models of financial markets by incorporating divergent risk-free interest rates for borrowing and deposits. Divergent interest rates create arbitrage opportunities if each market participant is allowed both to borrow and lend money. In our model, we circumvent such arbitrage opportunities by allowing only one institution to act as a bank (granting risk-free credits and financial investments). The surplus of this bank has to be redistributed to the market participants.

Keywords: Asset pricing; Portfolio choice; Divergent borrowing and deposit rates (search for similar items in EconPapers)
JEL-codes: G11 G12 (search for similar items in EconPapers)
Date: 2019
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Handle: RePEc:eee:quaeco:v:71:y:2019:i:c:p:48-55