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

39 Pages Posted: 25 Aug 2014 Last revised: 7 Apr 2023

See all articles by Cristian Badarinza

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); European Corporate Governance Institute (ECGI)

Multiple version iconThere are 3 versions of this paper

Date Written: August 2014

Abstract

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.

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 2014). NBER Working Paper No. w20408, Available at SSRN: https://ssrn.com/abstract=2486398

Cristian Badarinza (Contact Author)

National University of Singapore (NUS) ( email )

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John Y. Campbell

Harvard University - Department of Economics ( email )

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Tarun Ramadorai

Imperial College London ( email )

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Centre for Economic Policy Research (CEPR) ( email )

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European Corporate Governance Institute (ECGI) ( email )

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Belgium

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