AgEcon Search (University of Minnesota, USA) · 1977 · 45 citations · 0 references
BusinessEconomicsFinanceFinancial EconomicsFinancial MarketsMonetary EconomicsCapital MarketsCredit MarketsCredit RiskFinancial RiskCredit ConditionsCredit Terms AdjustmentCredit Terms ManagementCredit Terms NegotiationCredit Terms Policy
A model is presented incorporating various elements involved in t he determination of the interest rate in a capital market that is not purely competitive.It yields an equilibrium relation between the interest rate and the probability of default such that hi gher probability implies higher interest.Other factors affecting the rate of interest are the elasticity of demand, the .perceived rate of loss related to default, and an extra premium due to risk aversion.The equilibrium relation is used as an econometric model which, under appropriate specifications, generates estimates of the weights attached to subjective risk indicators.The data cover transactions in the Eurocurrency market and deal only with publicly guaranteed loans to developing countries.Several economic indicators are identified as significantly affecting the subjective probability.These can be used to generate estimates of the subjective probabilities themselves.