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Measuring the economic value of loan advice

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  • Taylor, Nicholas

Abstract

The purpose of this paper is to provide a method by which the economic value of loan advice can be measured. This is achieved by defining advice in terms of the forecasts of future repayments in order to produce a disutility-minimising loan strategy. The economic value of this strategy is then calculated by considering the fee one is willing to pay to avoid switching to a competing strategy during each period. Applying the methodology to UK fixed and variable mortgage rates produces performance fees that are high when advice takes account of the dynamics of repayments. Moreover, the conditions under which these fees are significantly different from zero are identified.

Suggested Citation

  • Taylor, Nicholas, 2012. "Measuring the economic value of loan advice," Economics Letters, Elsevier, vol. 117(3), pages 615-618.
    • Handle: RePEc:eee:ecolet:v:117:y:2012:i:3:p:615-618
    DOI: 10.1016/j.econlet.2012.08.006
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    References listed on IDEAS

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    1. Chan, K C, et al, 1992. "An Empirical Comparison of Alternative Models of the Short-Term Interest Rate," Journal of Finance, American Finance Association, vol. 47(3), pages 1209-1227, July.
    2. Narasimhan Jegadeesh & Joonghyuk Kim & Susan D. Krische & Charles M. C. Lee, 2004. "Analyzing the Analysts: When Do Recommendations Add Value?," Journal of Finance, American Finance Association, vol. 59(3), pages 1083-1124, June.
    3. David E. Rapach & Jack K. Strauss & Guofu Zhou, 2010. "Out-of-Sample Equity Premium Prediction: Combination Forecasts and Links to the Real Economy," Review of Financial Studies, Society for Financial Studies, vol. 23(2), pages 821-862, February.
    4. Bonaccio, Silvia & Dalal, Reeshad S., 2006. "Advice taking and decision-making: An integrative literature review, and implications for the organizational sciences," Organizational Behavior and Human Decision Processes, Elsevier, vol. 101(2), pages 127-151, November.
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    Cited by:

    1. Parnes, Dror, 2015. "Determining the economic value of ambiguous loan portfolios," Finance Research Letters, Elsevier, vol. 13(C), pages 148-154.

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    More about this item

    Keywords

    Loan advice; Disutility; Performance fees;
    All these keywords.

    JEL classification:

    • C1 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General
    • G1 - Financial Economics - - General Financial Markets

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