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Divergent interest rates in the theory of financial markets

Author

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  • Kruschwitz, Lutz
  • Löffler, Andreas
  • Lorenz, Daniela

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.

Suggested Citation

  • Kruschwitz, Lutz & Löffler, Andreas & Lorenz, Daniela, 2019. "Divergent interest rates in the theory of financial markets," The Quarterly Review of Economics and Finance, Elsevier, vol. 71(C), pages 48-55.
    • Handle: RePEc:eee:quaeco:v:71:y:2019:i:c:p:48-55
    DOI: 10.1016/j.qref.2018.09.003
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    References listed on IDEAS

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    Cited by:

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    2. Tatiana Grishina & Alexey Ponomarenko, 2023. "Banks’ interest rate setting and transitions between liquidity surplus and deficit," SN Business & Economics, Springer, vol. 3(12), pages 1-18, December.

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    More about this item

    Keywords

    Asset pricing; Portfolio choice; Divergent borrowing and deposit rates;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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