Title

The Impact Of The Early Withdrawal Option On Time Deposit Pricing

Abstract

Retail certificates of deposit contain an early withdrawal option allowing investors (depositors) to sell them back to banks in exchange for their face value less a prespecified withdrawal penalty. The Withdrawal Option Pricing Hypothesis posits that this put option is priced by banks and investors, suggesting that, ceteris paribus, CD yields will be lower than Treasury yields and that CD-Treasury yield spreads vary over time in ways predicted by option pricing theory. We show that yield spreads between five-year retail CDs of at least $90,000 and comparable maturity Treasuries are generally negative, despite reasons why CDs should provide higher yields than Treasuries. We also show that changes in the spread are negatively related to expected interest-rate levels (represented by the slope of the yield curve), negatively related to levels of interest rates (represented by the short-term riskless rate), and negatively related to expectations of interest-rate volatility (represented by implied volatility from exchange traded options). © 2000 Board of Trustees of the University of Illinois.

Publication Date

1-1-2000

Publication Title

Quarterly Review of Economics and Finance

Volume

40

Issue

1

Number of Pages

107-120

Document Type

Article

Personal Identifier

scopus

DOI Link

https://doi.org/10.1016/s1062-9769(99)00047-2

Socpus ID

0346930349 (Scopus)

Source API URL

https://api.elsevier.com/content/abstract/scopus_id/0346930349

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