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Mortgage Timing

67 Pages Posted: 23 Dec 2008 Last revised: 2 Oct 2015

Ralph S. J. Koijen

New York University (NYU) - Department of Finance; Centre for Economic Policy Research (CEPR); National Bureau of Economic Research (NBER)

Otto Van Hemert

Man AHL

Stijn Van Nieuwerburgh

New York University Stern School of Business, Department of Finance; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR)

Multiple version iconThere are 3 versions of this paper

Date Written: September 5, 2008

Abstract

We study how the term structure of interest rates relates to mortgage choice, both at the household and the aggregate level. A simple utility framework of mortgage choice points to the long-term bond risk premium as theoretical determinant: when the bond risk premium is high, fixed-rate mortgage payments are high, making adjustable-rate mortgages more attractive. This long-term bond risk premium is markedly different from other term structure variables that have been proposed, including the yield spread and the long yield. We confirm empirically that the bulk of the time variation in both aggregate and loan-level mortgage choice can be explained by time variation in the bond risk premium. This is true whether bond risk premia are measured using forecasters' data, a VAR term structure model, or from a simple household decision rule based on adaptive expectations. This simple rule moves in lock-step with mortgage choice, lending credibility to a theory of strategic mortgage timing by households.

Suggested Citation

Koijen, Ralph S. J. and Van Hemert, Otto and Van Nieuwerburgh, Stijn, Mortgage Timing (September 5, 2008). Available at SSRN: https://ssrn.com/abstract=1319946 or http://dx.doi.org/10.2139/ssrn.1319946

Ralph S. J. Koijen (Contact Author)

National Bureau of Economic Research (NBER) ( email )

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Cambridge, MA 02138
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New York University (NYU) - Department of Finance ( email )

Stern School of Business
44 West 4th Street
New York, NY 10012-1126
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HOME PAGE: http://www.koijen.net

Centre for Economic Policy Research (CEPR) ( email )

77 Bastwick Street
London, EC1V 3PZ
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Otto Van Hemert

Man AHL ( email )

Riverbank House
2 Swan Lane
London, EC4R 3AD
United Kingdom

Stijn Van Nieuwerburgh

New York University Stern School of Business, Department of Finance ( email )

44 West 4th Street
Suite 9-190
New York, NY 10012-1126
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Centre for Economic Policy Research (CEPR)

77 Bastwick Street
London, EC1V 3PZ
United Kingdom

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