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Please use this identifier to cite or link to this item:
http://hdl.handle.net/2451/26377
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| Title: | Mortgage Timing |
| Authors: | Koijen, Ralph S.J.
Van Hemert, Otto
Van Nieuwerburgh, Stijn |
| Issue Date: | 16-Nov-2006 |
| Series/Report no.: | FIN-06-022 |
| Abstract: | Mortgages can be broadly classified into adjustable-rate mortgages
(ARMs) and fixed-rate mortgages (FRMs). We document a surprising amount
of time variation in the fraction of newly-originated mortgages that are
of either type in the US and UK. A simple utility framework points to
the importance of term structure variables in explaining this variation.
In particular, the inflation risk premium, real interest rate risk
premium and both the real rate and expected inflation volatility arise
as potential determinants. We use a flexible VAR-model to measure these
four term structure variables and show that they account for the bulk of
variation in the ARM share. Risk premia alone explain sixty percent of
the time variation in mortgage choice. Other term structure variables,
such as the yield spread, seem only weakly related to the ARM share. We
uncover interesting differences between the US and the UK. In the US,
the inflation risk premium is most strongly related to the ARM share,
while in the UK it is the real rate risk premium. In the US, FRMs
contain a prepayment option. We analyze the impact of the prepayment
option on optimal mortgage choice. |
| URI: | http://hdl.handle.net/2451/26377 |
| Appears in Collections: | Finance Working Papers
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