Reilly’s gravity law adapted to finance

Abstract

The present paper proposes new indicators that explain the pricing of the unitary pure interest rates and interests by adapting previous Reilly’s Law (RL) models of urban economics and regional economics and Financial Gravity (FG) models for financial services. A panel dataset of 114 countries for 1967-2021 is handled, applying the OLS methodology. The results show the higher explanatory power of the adaptation of the FG models rather than the proposed adaptation of the RL ones. Purpose: This paper tries to adapt previous Gravity Equations from Urban Economics to Finance and empirically checks whether they behave better than the recently found Financial Gravity (FG) models. For that, new indicators are provided jointly with their adaptations to Ordinary Least Square (OLS) methods. Additionally, an economic perspective of the bid-asks of financial products is provided. Design/methodology/approach: OLS methods are used to check the desirability and accuracy of the new indicators. A panel dataset of 114 countries for 1967-2021 is handled, applying the OLS methodology. Findings: The most adequate are the FG models after the empirical check, providing the desirable properties of those models. The results show the higher explanatory power of the adaptation of the FG models rather than the proposed adaptation of the RL ones. Originality: This is the first paper, to the author’s knowledge, on providing an adaptation of Reilly’s Law from urban economics models to finance, also providing empirical evidence after adapting these models to linear expressions for applying OLS methods. We also provide evidence on the statistical equality between the unitary pure interest of loan and deposit interests, confirming the good properties of the FG models.