Mortgage Choice as a Natural Field Experiment on Choice Under Risk
AbstractMicrodata from the UK Survey of Mortgage Lenders is used to model borrowers' choices between variable and fixed rate mortgages. The data is treated as a large-scale "natural experiment" on risky choice, with the choice of a fixed rate corresponding to the "safe choice" in a more conventional experimental setting. The choice is assumed to depend partly on risk attitude, and partly on expectations of future movements in interest rates. Approximately 280,000 choices, made by borrowers between 1992 and 2001, appear in the sample. The ordered probit model is used for estimation, while taking account of a number of econometric issues including missing counterfactuals, selectivity, and endogeneity. Explanatory variables are divided into three groups: mortgage price variables; interest rate expectations; and borrower characteristics. A large number of strong effects are found, including: fixing is more likely when agents expect interest rates to increase; the presence of female borrowers increases the propensity to fix; older borrowers are less likely to fix; high-income borrowers are less likely to fix, particularly so if income is "self-certified"; those with higher loan-to-value ratios are less likely to fix. These findings amount to new insights in the modelling of choice under risk.Series: University of East Anglia Applied and Financial Economics Working Paper Series
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Bibliographic InfoPaper provided by School of Economics, University of East Anglia, Norwich, UK. in its series University of East Anglia Applied and Financial Economics Working Paper Series with number 020.
Date of creation: 01 Nov 2010
Date of revision:
Postal: Helen Chapman, School of Economics, University of East Anglia, Norwich Research Park, Norwich, NR4 7TJ, UK
Find related papers by JEL classification:
- G20 - Financial Economics - - Financial Institutions and Services - - - General
- M13 - Business Administration and Business Economics; Marketing; Accounting - - Business Administration - - - New Firms; Startups
This paper has been announced in the following NEP Reports:
- NEP-ALL-2010-11-13 (All new papers)
- NEP-CBE-2010-11-13 (Cognitive & Behavioural Economics)
- NEP-URE-2010-11-13 (Urban & Real Estate Economics)
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- David Masclet & Youenn Loheac & Laurent Denant-Boemont & Nathalie Colombier, 2004.
"Group and individual risk preferences : a lottery-choice experiment,"
Cahiers de la Maison des Sciences Economiques
bla06063, Université Panthéon-Sorbonne (Paris 1), revised Sep 2006.
- Richard A. Phillips & James H. VanderHoff, 1994. "Alternative Mortgage Instruments, Qualification Constraints and the Demand for Housing: An Empirical Analysis," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 22(3), pages 453-477.
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