Interest Rate Fixation Periods and Reference Points

45 Pages Posted: 28 May 2019 Last revised: 3 May 2021

See all articles by Moritz Lukas

Moritz Lukas

University of Hamburg

Markus Noeth

University of Hamburg

Date Written: March 12, 2021

Abstract

This paper shows how retail borrowers' focus on recent interest rates as reference points may lead to choices of interest rate fixation periods which are inconsistent with normative predictions. A laboratory experiment reveals that borrowers prefer longer interest rate fixation periods when interest rates have fallen and shorter interest rate fixation periods when interest rates have risen. Normative drivers of interest rate fixation choice related to borrower characteristics, loan attributes, and pricing variables cannot explain these decisions. 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: Behavioral Finance, Experimental Finance, Credit, Mortgages

JEL Classification: G21, D12, D14, C91

Suggested Citation

Lukas, Moritz and Noeth, Markus, Interest Rate Fixation Periods and Reference Points (March 12, 2021). Available at SSRN: https://ssrn.com/abstract=3380125 or http://dx.doi.org/10.2139/ssrn.3380125

Moritz Lukas (Contact Author)

University of Hamburg ( email )

Allende-Platz 1
Hamburg, 20146
Germany

Markus Noeth

University of Hamburg ( email )

Chair of Banking and Behavioral Finance
WiSo
Hamburg, 20146
Germany
+49-40-42838 3337 (Phone)
+49-40-42838 5512 (Fax)

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