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Uncertainty and switching in the mortgage market

Author

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  • C鬩ne Gondat-Larralde
  • Frank Strobel

Abstract

We examine when it might be optimal for borrowers to switch providers of debt products such as their mortgage, allowing in particular for the role of uncertainty by constructing a stylized real options model of the decision problem involved. We illustrate with numerical examples, and then calibrate the model for the UK mortgage market for the period October 1998 to March 2005; significant magnitudes of trigger levels can arise even when standard switching costs are zero, providing an additional, risk-related explanation to the inertia commonly observed in borrowers' product choices.

Suggested Citation

  • C鬩ne Gondat-Larralde & Frank Strobel, 2013. "Uncertainty and switching in the mortgage market," Applied Economics, Taylor & Francis Journals, vol. 45(21), pages 3068-3073, July.
    • Handle: RePEc:taf:applec:v:45:y:2013:i:21:p:3068-3073
    DOI: 10.1080/13504851.2012.690842
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    References listed on IDEAS

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    1. Céline Gondat-Larralde & Erlend Nier, 2006. "Switching costs in the market for personal current accounts: some evidence for the United Kingdom," Bank of England working papers 292, Bank of England.
    2. Ausubel, Lawrence M, 1991. "The Failure of Competition in the Credit Card Market," American Economic Review, American Economic Association, vol. 81(1), pages 50-81, March.
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