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Can the Lending Practices Index Forecast Interest Rates of Financial Institutions?
Journal of Insurance and Finance
2011, 22(3),
pp.69-93
Publisher : Korea Insurance Research Institute
Research Area : Business Management
Publisher : Korea Insurance Research Institute
Research Area : Business Management
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This paper investigates the usefulness of lending practice index as a determinant of lending interest rates. Interest rates are determined by supply and demand on the money. The lending practice index is the proxy of the supply side, while demand and credit risk index is the proxy of the demand side. Certificate of Deposit(CD) rate has been the base rate in deciding the loan interest in Korea. I use the data of the lending practice index on domestic financial institutions, so the data periods are limited to 2002 1Q - 2010 3Q, because of the inconsistency of survey sample frame. Due to the significant and high correlation with demand index, credit risk index is excluded from the data. The results, through panel analysis and forecast error analysis, indicate the uselessness of the lending practice index survey. Lending interest determinant model including CD rate has relatively higher explanatory power, but forecasted interests by the estimated model are not statistically different from actual interest rates.
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