Maturity Choice and Reference Points
40 Pages Posted: 28 May 2019 Last revised: 10 Feb 2020
Date Written: April 30, 2019
This paper shows how retail borrowers' focus on recent interest rates as reference points may lead to maturity choices which are inconsistent with normative predictions. A laboratory experiment reveals that borrowers prefer longer maturities when interest rates have fallen and shorter maturities when interest rates have risen. Normative drivers of maturity choice related to borrower characteristics, loan attributes, and pricing variables cannot explain these patterns of maturity choice. Market data from a mortgage broker confirms our findings in a context in which sound financial decisions are of prime importance for households' financial well-being.
Keywords: Credit, Mortgages, Banking, Behavioral Finance, Maturity Choice
JEL Classification: G21, D12, D14, C91
Suggested Citation: Suggested Citation