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Mortgage Choice as a Natural Field Experiment on Choice Under Risk

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Author Info

  • Philomena M. Bacon

    (University of East Anglia)

  • Peter Moffatt

    () (School of Economics, University of East Anglia)

Abstract

Microdata 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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Paper 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.

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Date of creation: 01 Nov 2010
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Handle: RePEc:uea:aepppr:2010_20

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Keywords: risky choice; fixed and variable rate mortgages; counterfactuals; interest rate expectations; ordered probit.;

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