BASE RATE
MODEL
Base rate as we know, is the minimum rate of interest that a
bank is allowed to charge from its customers. It is a rate which the bank lends
to the discount houses, which effectively controls the interest rates charged
throughout the banking system. A rule stipulates that no bank can offer loans
at a rate lower than the base to any of its customers.
The question is: Is it possible to predict the base rates of
other banks if the base rate of one bank is known? The answer depends mainly
one factor which was discussed from my previous diary (or weblog) title: “Adongo’s
Central Prediction theory”. In the general regression theory we
requires 5 or more observed values to fit the regression model whereas,
in the general central prediction theory, we need one or more observed values to
fit the central prediction model.
Let us consider some Bank base rate for 25th
November, 2013 below.
Bank
|
Bank
|
Bank
|
Bank
|
Bank
|
Bank
|
Bank
|
Bank
|
|
GCB
Bank
|
HFC
Bank
|
UniBank
|
Bank of
Africa
|
Agric. Dev.Bank
|
Standard
Charted
Bank
|
GT Bank
|
Stanbic
Bank
|
|
Base Rate
|
22.27%
|
21.30%
|
24.28%
|
25.57%
|
23.91%
|
16.66%
|
18.43%
|
16.87%
|
We can use the central prediction as a fitted model for the
datum above. The model is given as:
X2=0.48x1+10.65
X3=0.48x1+0.13x2+10.65
X4=0.48x1+0.13x2+0.06x3+10.65
X5=0.48x1+0.13x2+0.06x3-0.065x4+10.65
X6=0.48x1+0.13x2+0.06x3-0.065x4-0.3x5+10.65
X7=0.48x1+0.13x2+0.06x3-0.065x4-0.3x5+10.65
X8=0.48x1+0.13x2+0.06x3-0.065x4-0.3x5+0.077x6+10.65
To determine validity of the model let us assumed that the
base rate of GCB Bank is 22.27% and the base rates for the rest of the banks are
not known. Substituting 22.27% into the model, we have
HFC Bank (x2)=21.34%
UniBank (x3)=24.11%
Bank of Africa(x4)=25.56%
Agric.Dev.Bank (x5)=23.90%
Standard Charted Bank(x6)=16.66%
GT Bank (x7)=18.02%
Stanbic Bank (x8)=16.88%
Comparing the estimated values to the actual values from the
table above, it indicates that the model is perfect.
REFERENCE
*Adongo, Bill(Me)
Diary, “Adongo Central Prediction Theory”
