Two-Sided Matching and Spread Determinants in the Loan Market
No 60702, Working Papers from University of California-Irvine, Department of Economics
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.
Keywords: Two-sided matching; Loan spread; Bayesian inference; Gibbs sampling with data augmentation (search for similar items in EconPapers)
JEL-codes: C11 C78 G21 L11 (search for similar items in EconPapers)
Pages: 39 pages
New Economics Papers: this item is included in nep-ban, nep-fin, nep-fmk, nep-lab and nep-mkt
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Persistent link: https://EconPapers.repec.org/RePEc:irv:wpaper:060702
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