What Calls to ARMs? International Evidence on Interest Rates and the Choice of Adjustable-Rate Mortgages / Cristian Badarinza, John Y. Campbell, Tarun Ramadorai.

Format:

Book

Author/Creator:

Badarinza, Cristian.

Contributor:

National Bureau of Economic Research.

Campbell, John Y.

Ramadorai, Tarun.

Series:

Working Paper Series (National Bureau of Economic Research) no. w20408.

NBER working paper series no. w20408

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2014.

Summary:

The relative popularity of adjustable-rate mortgages (ARMs) and fixed-rate mort- gages (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 expectations 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.

Notes:

Print version record

August 2014.