Household Risk Management and Optimal Mortgage Choice

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Household Risk Management and Optimal Mortgage Choice

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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.
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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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  • FAS Scholarly Articles [7501]
    Peer reviewed scholarly articles from the Faculty of Arts and Sciences of Harvard University
 
 

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