Interest rate margins: a decomposition of dynamic oligopolistic conduct and market fundamentals

Emanuel Barnea and Moshe Kim

Applied Financial Economics, 2007, vol. 17, issue 6, 487-499

Abstract: We propose a model in which the evolution of interest rate margin (markup) in banking is the outcome of two major components: (i) dynamic oligopolistic conduct and (ii) dynamics of market fundamentals. The model is specified such that oligopolistic dynamics are separated from the dynamics of fundamentals. Consistent with the theory, we employ the error-correction model which generates results indicating that margins are significantly different from the traditional measure once fundamentals are filtered out.

Date: 2007
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DOI: 10.1080/09603100600690077

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