What Calls to ARMs? International Evidence on Interest Rates and the Choice of Adjustable-Rate Mortgages
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CitationBadarinza C, Campbell JY, Ramadorai T. 2015. What Calls to ARMs? International Evidence on Interest Rates and the Choice of Adjustable-Rate Mortgages. Working paper, Department of Economics, Harvard University.
AbstractThe relative popularity of adjustable-rate mortgages (ARMs) and Öxed-rate mortgages (FRMs) varies considerably both across countries and over time. We ask how movements in current and expected future interest rates a§ect 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 expectations of future movements in ARM rates do a§ect mortgage choice, particularly in more recent data since 2001. However longer-term (three-year) rational forecasts of ARM rates have a relatively weak e§ect, 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.
Citable link to this pagehttp://nrs.harvard.edu/urn-3:HUL.InstRepos:24873716
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