Estimation of the Loan Spread Equation with Endogenous Bank-Firm Matching

Jiawei Chen

A chapter in Structural Econometric Models, 2013, vol. 31, pp 251-289 from Emerald Group Publishing Limited

Abstract: This article estimates the loan spread equation taking into account the endogenous matching between banks and firms in the loan market. To overcome the endogeneity problem, I supplement the loan spread equation with a two-sided matching model and estimate them jointly. Bayesian inference is feasible using a Gibbs sampling algorithm that performs Markov chain Monte Carlo (MCMC) simulations. I find that medium-sized banks and firms tend to be the most attractive partners, and that liquidity is also a consideration in choosing partners. Furthermore, banks with higher monitoring ability charge higher spreads, and firms that are more leveraged or less liquid are charged higher spreads.

Keywords: Loan spread equation; two-sided matching; Bayesian inference; Gibbs sampling; G21; C78; C11 (search for similar items in EconPapers)
Date: 2013
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Persistent link: https://EconPapers.repec.org/RePEc:eme:aecozz:s0731-9053(2013)0000032009

DOI: 10.1108/S0731-9053(2013)0000032009

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