What Calls to ARMs? International Evidence on Interest Rates and the Choice of Adjustable Rate Mortgages

Badarinza, Cristian, Campbell, John and Ramadorai, Tarun (2013) What Calls to ARMs? International Evidence on Interest Rates and the Choice of Adjustable Rate Mortgages. SSRN.

Abstract

The form of the interest rate on newly issued mortgages, namely whether they are adjustable-rate mortgages (ARMs) or fixed-rate mortgages (FRMs), varies considerably both across countries and over time. We attempt to uncover the sources of this variation in the "ARM share" of ARMs issued, relative to total mortgage issuance. Our emphasis is on drawing inferences about how household mortgage choice is affected by households' reactions to movements in interest rates. We complement newly assembled panel data from nine countries on the ARM share and mortgage interest rates with a panel instrumental variables approach in which we test exclusion restrictions that are implied by alternative explanations for variation in the ARM share. We uncover strong evidence in favour of current cost minimization as the proximate driver of household mortgage choice.

Item Type: Other Working Paper
Keywords: mortgage choice, adjustable-rate, fixed-rate, household finance, international
Subject(s): Finance
Centre: Faculty of Finance
Date Deposited: 11 Mar 2014 17:28
Last Modified: 23 Oct 2015 14:08
URI: http://eureka.sbs.ox.ac.uk/id/eprint/5016

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