WHEN DOES THE PRIME RATE CHANGE

We study the frequency of prime rate changes. We model the prime rate as a time-series variable that can be changed only at some cost. This yields a legit model in which the probability of a prime rate change is a function of market variables. We test this model using data from a micro data set that gives the dating of prime rate changes. The results indicate that adjustment costs are important to the prime rate adjustment process, and that changes in exogenous variables have a significantly larger effect on the probability of a prime rate increase than decrease.