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Two-Sided Matching and Spread Determinants in the Loan Market

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  • 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.

Suggested Citation

  • Jiawei Chen, 2006. "Two-Sided Matching and Spread Determinants in the Loan Market," Working Papers 060702, University of California-Irvine, Department of Economics.
    • Handle: RePEc:irv:wpaper:060702
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    Cited by:

    1. Jeremy T. Fox & David H. Hsu & Chenyu Yang, 2012. "Unobserved Heterogeneity in Matching Games with an Application to Venture Capital," NBER Working Papers 18168, National Bureau of Economic Research, Inc.
    2. Kaniska Dam, 2007. "A Two-Sided Matching Model of Monitored Finance," Working papers DTE 383, CIDE, División de Economía.
    3. Ueda, Masako & Li, Fei, 2005. "CEO-Firm Match and Principal-Agent Problem," CEPR Discussion Papers 5119, C.E.P.R. Discussion Papers.
    4. Gupta, Anurag & Singh, Ajai K. & Zebedee, Allan A., 2008. "Liquidity in the pricing of syndicated loans," Journal of Financial Markets, Elsevier, vol. 11(4), pages 339-376, November.

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    More about this item

    Keywords

    Two-sided matching; Loan spread; Bayesian inference; Gibbs sampling with data augmentation;
    All these keywords.

    JEL classification:

    • C11 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Bayesian Analysis: General
    • 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; Micro Finance 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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