Estimating the relationship between collateral and interest rate: A comparison of methods

This paper uses a variety of estimation methods to explore the empirical relationship between interest rate and collateral requirements in bank loan contracts. Methods that do not allow for endogenous contract terms detect a positive reciprocal association between interest rate and collateral. Methods that allow for endogenous contract terms point to a strong positive effect of interest rate on collateral but the effect of collateral on interest rate is weaker. This highlights the importance of incorporating the endogenous nature of contract terms in empirical work.

Automated summary

This paper explores the empirical relationship between interest rate and collateral requirements in bank loan contracts using various estimation methods. It finds that there is a positive reciprocal association between interest rate and collateral, but the effect of interest rate on collateral is stronger than the effect of collateral on interest rate. The study highlights the importance of considering the endogenous nature of contract terms in empirical work.