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Journal of Financial Services Research

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01-06-2011

Bank-Specific Daily Interest Rate Adjustment in the Dutch Mortgage Market

Authors: Leo de Haan, Elmer Sterken

Published in: Journal of Financial Services Research | Issue 3/2011

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Abstract

This paper presents an empirical analysis of the interest rate setting behavior of the four largest banks in the Dutch mortgage market, using advertised interest rates at a daily frequency. The evidence for the long run pricing behaviour suggests that the banks operate in a competitive environment as they base their interest rates on funding cost. However, two banks appear to be less cost sensitive than the others. In the short run, most of the banks adjust their rates less strongly to funding cost increases than to decreases, which suggests competitive pressures. For one bank significant evidence is found for a quicker response to negative than to positive deviations of actual from desired interest rates.

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ABN-Amro and Fortis have merged on 1 July 2010, after our sample period has ended.

The focus is on interest rate setting and not on the quantities of mortgage loans supplied, because banks are likely to participate in a game of Bertrand price competition instead of Cournot quantity oligopoly (see also Freixas and Rochet 1997).

It should be noted that a precise comparison between the rates offered by the individual banks can be troubled by the diversity of the products involved.

These differences may reflect relative market power or simply differences in products (note that the latter could also be considered as elements of market power), or even cross-subsidization.

In theory, the effects of shocks to volatility can be asymmetric as well (see Bettendorf et al. 2009). One can for instance assume that the residuals in the short-run specification follow an EGARCH-process. Since our dependent variables do not demonstrate ARCH-effects (according to the tests for ARCH-presence in the ECMs), we refrain from the latter type of asymmetry.

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Title: Bank-Specific Daily Interest Rate Adjustment in the Dutch Mortgage Market
Authors: Leo de Haan
Elmer Sterken
Publication date: 01-06-2011
Publisher: Springer US
Published in: Journal of Financial Services Research / Issue 3/2011
Print ISSN: 0920-8550
Electronic ISSN: 1573-0735
DOI: https://doi.org/10.1007/s10693-010-0095-2