Abstract
We analyze here the optimal interest rate determination of a bank that learns about the repayment behavior of its customers from their past behavior. Optimal dynamic methods are first suggested for determining the interest rate for a bank that learns about the probability of default of its borrowers. It is shown that such a bank determines lower than or equal interest rates than a bank that does not adapt its probability of default according to its past experience. Similar results also obtain when the bank learns about the probabilities that its borrowers belong to each of K (K larger than 2) quality groups.
Original language | English |
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Pages (from-to) | 269-281 |
Number of pages | 13 |
Journal | Journal of Banking and Finance |
Volume | 4 |
Issue number | 3 |
DOIs | |
State | Published - 1980 |