Household Risk Management and Optimal Mortgage Choice
| Title: | Household Risk Management and Optimal Mortgage Choice |
| Author: |
Campbell, John; Cocco, Joao
Note: Order does not necessarily reflect citation order of authors. |
| Citation: | Campbell, John Y., and Joao F. Cocco. 2003. Household risk management and optimal mortgage choice. Quarterly Journal of Economics 118(4): 1449-1494. |
| Full Text & Related Files: |
campbell_household.pdf (404.8Kb; PDF) 
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| Abstract: | This paper asks how a household should choose between a fixed-rate (FRM) and an adjustable-rate (ARM) mortgage. In an environment with uncertain inflation a nominal FRM has a risky real capital value, whereas an ARM has a stable real capital value but short-term variability in required real payments. Numerical solution of a life-cycle model with borrowing constraints and income risk shows that an ARM is generally attractive, but less so for a risk-averse household with a large mortgage, risky income, high default cost, or low moving probability. An inflation-indexed FRM can improve substantially on standard nominal mortgages. |
| Published Version: | http://dx.doi.org/10.1162/003355303322552847 |
| Terms of Use: | This article is made available under the terms and conditions applicable to Other Posted Material, as set forth at http://nrs.harvard.edu/urn-3:HUL.InstRepos:dash.current.terms-of-use#LAA |
| Citable link to this page: | http://nrs.harvard.edu/urn-3:HUL.InstRepos:3157876 |
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Peer reviewed scholarly articles from the Faculty of Arts and Sciences of Harvard University
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