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

33 Pages Posted: 4 Jun 2013 Last revised: 3 Aug 2016

Cristian Badarinza

National University of Singapore (NUS)

John Y. Campbell

Harvard University - Department of Economics; National Bureau of Economic Research (NBER)

Tarun Ramadorai

Imperial College London; Centre for Economic Policy Research (CEPR)

Multiple version iconThere are 3 versions of this paper

Date Written: August 2016

Abstract

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

Keywords: mortgage choice, interest rate, adjustable-rate, fixed-rate, household finance, international

JEL Classification: G21, N20, R21, R31

Suggested Citation

Badarinza, Cristian and Campbell, John Y. and Ramadorai, Tarun, What Calls to ARMs? International Evidence on Interest Rates and the Choice of Adjustable-Rate Mortgages (August 2016). Available at SSRN: https://ssrn.com/abstract=2273430 or http://dx.doi.org/10.2139/ssrn.2273430

Cristian Badarinza

National University of Singapore (NUS) ( email )

Bukit Timah Road 469 G
Singapore, 117591
Singapore

John Y. Campbell

Harvard University - Department of Economics ( email )

Littauer Center
Room 213
Cambridge, MA 02138
United States
617-496-6448 (Phone)
617-495-7730 (Fax)

HOME PAGE: http://scholar.harvard.edu/campbell

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Tarun Ramadorai (Contact Author)

Imperial College London ( email )

South Kensington Campus
Exhibition Road
London, Greater London SW7 2AZ
United Kingdom

HOME PAGE: http://www.tarunramadorai.com

Centre for Economic Policy Research (CEPR) ( email )

77 Bastwick Street
London, EC1V 3PZ
United Kingdom

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