What calls to ARMs? International evidence on interest rates and the choice of Adjustable-Rate Mortgages
File(s)
Accepted version
Author(s)
Badarinza, Cristian
Campbell, John Y
Ramadorai, Tarun
Type
Journal Article
Abstract
The relative popularity of adjustable-rate mortgages (ARMs) and fixed-rate mortgages (FRMs) varies considerably both across countries and over time. We ask how movements in current and expected future interest rates affect the share of ARMs in total mortgage issuance. Using a nine-country panel and instrumental variables methods, we present evidence that near-term (one-year) rational forecasts of future movements in ARM rates do affect mortgage choice, particularly in more recent data since 2001. However, longer-term (three-year) rational forecasts of ARM rates have a relatively weak effect, and the current spread between FRM and ARM rates also matters, suggesting that households are concerned with current interest costs as well as with lifetime cost minimization. These conclusions are robust to alternative (adaptive and survey-based) models of household expectations.
Date Issued
2018-05-01
Date Acceptance
2016-05-31
Citation
Management Science, 2018, 64 (5), pp.2275-2288
ISSN
0025-1909
Publisher
INFORMS
Start Page
2275
End Page
2288
Journal / Book Title
Management Science
Volume
64
Issue
5
Copyright Statement
© 2017, INFORMS.
Identifier
http://gateway.webofknowledge.com/gateway/Gateway.cgi?GWVersion=2&SrcApp=PARTNER_APP&SrcAuth=LinksAMR&KeyUT=WOS:000439102900017&DestLinkType=FullRecord&DestApp=ALL_WOS&UsrCustomerID=1ba7043ffcc86c417c072aa74d649202
Subjects
Social Sciences
Science & Technology
Technology
Management
Operations Research & Management Science
Business & Economics
mortgage choice
adjustable rate
fixed rate
household finance
TRANSMISSION
FINANCE
MODELS
MARKET
POLICY
Publication Status
Published
Date Publish Online
2017-02-02