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The Relationships between Mortgage Rates and Capital-Market Rates under Alternative Market Conditions

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  • Allen, Marcus T
  • Rutherford, Ronald C
  • Wiley, Marilyn K
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    Abstract

    Mortgage interest rates have become more integrated with other capital-market interest rates over recent decades, apparently as a result of the deregulation of financial markets. The link is both imperfect and time-varying. Mortgage rates during some time periods appear to be "sticky" with respect to their adjustment to changes in capital-market rates. We examine the relationship between weekly conventional mortgage rates and the interest rates on treasury and corporate securities under differing market conditions. We draw three conclusions based on the analysis. First, deregulation changed the link between mortgage rates and riskless interest rates, which confirms the findings of Goebel and Ma (1993). Second, mortgage rates were cointegrated with risky interest rates even before deregulation. Third, the link between mortgage rates and the risky bond rate can be associated with the behavior of the risk premium in the bond rate. The observed relationship is consistent with the stickiness observed by Haney (1988) and causes a more pronounced stickiness when rates are falling than when they are rising. Copyright 1999 by Kluwer Academic Publishers

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    Bibliographic Info

    Article provided by Springer in its journal Journal of Real Estate Finance & Economics.

    Volume (Year): 19 (1999)
    Issue (Month): 3 (November)
    Pages: 211-21

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    Handle: RePEc:kap:jrefec:v:19:y:1999:i:3:p:211-21

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    Web page: http://www.springerlink.com/link.asp?id=102945

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    Cited by:
    1. Leo de Haan & Elmer Sterken, 2005. "Asymmetric Price Adjustment in the Dutch Mortgage Market," DNB Working Papers 061, Netherlands Central Bank, Research Department.
    2. Abbas Valadkhani & Sajid Anwar & Amir Arjonandi, 2012. "How to capture the full extent of price stickiness in credit card interest rates?," Economics Working Papers wp12-02, School of Economics, University of Wollongong, NSW, Australia.
    3. Maria Arbatskaya & Michael R. Baye, 2004. "Are Prices ‘Sticky’ Online? Market Structure Effects and Asymmetric Responses to Cost Shocks in Online Mortgage Markets," Working Papers 2004-01, Indiana University, Kelley School of Business, Department of Business Economics and Public Policy.
    4. Abbas Valadkhani & Sajid Anwar, 2012. "Interest Rate Pass-Through and the Asymmetric Relationship between the Cash Rate and the Mortgage Rate," The Economic Record, The Economic Society of Australia, vol. 88(282), pages 341-350, 09.
    5. Valadkhani, Abbas, 2013. "The pricing behaviour of Australian banks and building societies in the residential mortgage market," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 26(C), pages 133-151.

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