IDEAS home Printed from https://ideas.repec.org/a/bla/jbfnac/v30y2003i9-10p1235-1251.html
   My bibliography  Save this article

The Structural Relation Between Mortgage and Market Interest Rates

Author

Listed:
  • Achla Marathe
  • Hany A. Shawky

Abstract

This paper analyzes the dynamic relationship between primary and secondary mortgage markets and the short‐term and long‐term market interest rates. Using a series of monthly data on fixed rate mortgage rates and GNMA rates, we explore the dependence and speed of adjustment in these primary and secondary mortgage rates to each other as well as to the long and short‐term government rates. The results indicate that residential mortgage rates in general, appear to follow the long‐term rate and are not very sensitive to movements in the short‐term interest rate.

Suggested Citation

  • Achla Marathe & Hany A. Shawky, 2003. "The Structural Relation Between Mortgage and Market Interest Rates," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 30(9‐10), pages 1235-1251, December.
    • Handle: RePEc:bla:jbfnac:v:30:y:2003:i:9-10:p:1235-1251
    DOI: 10.1111/j.0306-686X.2003.05110.x
    as

    Download full text from publisher

    File URL: https://doi.org/10.1111/j.0306-686X.2003.05110.x
    Download Restriction: no
    File URL: https://libkey.io/10.1111/j.0306-686X.2003.05110.x?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    References listed on IDEAS

    as
    1. Brennan, Michael J. & Schwartz, Eduardo S., 1982. "An Equilibrium Model of Bond Pricing and a Test of Market Efficiency," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 17(3), pages 301-329, September.
    2. James H. Stock & Mark W. Watson, 1993. "Business Cycles, Indicators, and Forecasting," NBER Books, National Bureau of Economic Research, Inc, number stoc93-1, March.
    3. Bomfim, Antulio N, 1997. "The Equilibrium Fed Funds Rate and the Indicator Properties of Term-Structure Spreads," Economic Inquiry, Western Economic Association International, vol. 35(4), pages 830-846, October.
    4. Schwartz, Eduardo S & Torous, Walter N, 1989. " Prepayment and the Valuation of Mortgage-Backed Securities," Journal of Finance, American Finance Association, vol. 44(2), pages 375-392, June.
    5. Brennan, Michael J. & Schwartz, Eduardo S., 1979. "A continuous time approach to the pricing of bonds," Journal of Banking & Finance, Elsevier, vol. 3(2), pages 133-155, July.
    6. Stock, James H. & Watson, Mark W. (ed.), 1993. "Business Cycles, Indicators, and Forecasting," National Bureau of Economic Research Books, University of Chicago Press, edition 1, number 9780226774886, December.
    7. Schwartz, Eduardo S & Torous, Walter N, 1992. "Prepayment, Default, and the Valuation of Mortgage Pass-through Securities," The Journal of Business, University of Chicago Press, vol. 65(2), pages 221-239, April.
    8. Green, Jerry & Shoven, John B, 1986. "The Effects of Interest Rates on Mortgage Prepayments," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 18(1), pages 41-59, February.
    9. Titman, Sheridan D & Torous, Walter N, 1989. " Valuing Commercial Mortgages: An Empirical Investigation of the Contingent-Claims Approach to Pricing Risky Debt," Journal of Finance, American Finance Association, vol. 44(2), pages 345-373, June.
    10. Ramaswamy, Krishna & Sundaresan, Suresh M., 1986. "The valuation of floating-rate instruments : Theory and evidence," Journal of Financial Economics, Elsevier, vol. 17(2), pages 251-272, December.
    11. Michael J. Brennan and Eduardo S. Schwartz., 1979. "A Continuous-Time Approach to the Pricing of Bonds," Research Program in Finance Working Papers 85, University of California at Berkeley.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Geoff Willcocks, 2009. "UK Housing Market: Time Series Processes with Independent and Identically Distributed Residuals," The Journal of Real Estate Finance and Economics, Springer, vol. 39(4), pages 403-414, November.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Gibson, Rajna & Lhabitant, Francois-Serge & Talay, Denis, 2010. "Modeling the Term Structure of Interest Rates: A Review of the Literature," Foundations and Trends(R) in Finance, now publishers, vol. 5(1–2), pages 1-156, December.
    2. Achla Marathe & Hany A. Shawky, 2003. "The Structural Relation Between Mortgage and Market Interest Rates," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 30(9-10), pages 1235-1251.
    3. Bjork, Tomas, 2009. "Arbitrage Theory in Continuous Time," OUP Catalogue, Oxford University Press, edition 3, number 9780199574742, Decembrie.
    4. Li, Lingfei & Linetsky, Vadim, 2014. "Optimal stopping in infinite horizon: An eigenfunction expansion approach," Statistics & Probability Letters, Elsevier, vol. 85(C), pages 122-128.
    5. Ran Deng & Shermineh Haghani, 2017. "FHA Loans in Foreclosure Proceedings: Distinguishing Sources of Interdependence in Competing Risks," JRFM, MDPI, vol. 11(1), pages 1-15, December.
    6. Kozicki, Sharon & Tinsley, P. A., 2001. "Shifting endpoints in the term structure of interest rates," Journal of Monetary Economics, Elsevier, vol. 47(3), pages 613-652, June.
    7. Boero, G. & Torricelli, C., 1996. "A comparative evaluation of alternative models of the term structure of interest rates," European Journal of Operational Research, Elsevier, vol. 93(1), pages 205-223, August.
    8. Chiang, Shu Ling & Yang, Tyler T. & Tsai, Ming Shann, 2016. "Assessing mortgage servicing rights using a reduced-form model: Considering the effects of interest rate risks, prepayment and default risks, and random state variables," Journal of Housing Economics, Elsevier, vol. 32(C), pages 29-46.
    9. Mikhail Chernov & Brett R. Dunn & Francis A. Longstaff, 2018. "Macroeconomic-Driven Prepayment Risk and the Valuation of Mortgage-Backed Securities," The Review of Financial Studies, Society for Financial Studies, vol. 31(3), pages 1132-1183.
    10. Jan Baldeaux & Fung & Katja Ignatieva & Eckhard Platen, 2015. "A Hybrid Model for Pricing and Hedging of Long-dated Bonds," Applied Mathematical Finance, Taylor & Francis Journals, vol. 22(4), pages 366-398, September.
    11. Eduardo S. Schwartz & Walter N. Torous, 1991. "Caps on Adjustable Rate Mortgages: Valuation, Insurance, and Hedging," NBER Chapters, in: Financial Markets and Financial Crises, pages 283-304, National Bureau of Economic Research, Inc.
    12. Bailey, Warren, 1989. "Applying a Stochastic Model to the Tenn Structure of Interest Rates in Malaysia," Jurnal Ekonomi Malaysia, Faculty of Economics and Business, Universiti Kebangsaan Malaysia, vol. 20(December), pages 3-17.
    13. Nicholas Sharp & Paul Johnson & David Newton & Peter Duck, 2009. "A New Prepayment Model (with Default): An Occupation-time Derivative Approach," The Journal of Real Estate Finance and Economics, Springer, vol. 39(2), pages 118-145, August.
    14. Ram Bhar & Carl Chiarella & Thuy-Duong To, 2004. "Estimating the Volatility Structure of an Arbitrage-Free Interest Rate Model Via the Futures Markets," Finance 0409003, University Library of Munich, Germany.
    15. Jun Chen & Yongheng Deng, 2013. "Commercial Mortgage Workout Strategy and Conditional Default Probability: Evidence from Special Serviced CMBS Loans," The Journal of Real Estate Finance and Economics, Springer, vol. 46(4), pages 609-632, May.
    16. Sercu, P., 1991. "Bond options and bond portfolio insurance," Insurance: Mathematics and Economics, Elsevier, vol. 10(3), pages 203-230, December.
    17. repec:wyi:journl:002109 is not listed on IDEAS
    18. Athanasios Orphanides & John C. Williams, 2002. "Robust Monetary Policy Rules with Unknown Natural Rates," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 33(2), pages 63-146.
    19. Ming Shann Tsai & Shu Ling Chiang, 2015. "A General Pricing Model for a Mortgage Insurance Contract Considering the Effects of Multivariate Random Variables on Termination Probabilities and Loss Rate," Housing Policy Debate, Taylor & Francis Journals, vol. 25(2), pages 289-307, April.
    20. Andreas D. Christopoulos & Robert A. Jarrow & Yildiray Yildirim, 2008. "Commercial Mortgage‐Backed Securities (CMBS) and Market Efficiency with Respect to Costly Information," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 36(3), pages 441-498, September.
    21. Archer, Wayne R. & Ling, David C. & McGill, Gary A., 1996. "The effect of income and collateral constraints on residential mortgage terminations," Regional Science and Urban Economics, Elsevier, vol. 26(3-4), pages 235-261, June.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:bla:jbfnac:v:30:y:2003:i:9-10:p:1235-1251. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Wiley Content Delivery (email available below). General contact details of provider: http://www.blackwellpublishing.com/journal.asp?ref=0306-686X .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.