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Interest rate fixation periods and reference points

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  • Lukas, Moritz
  • Nöth, Markus

Abstract

This paper shows how retail borrowers’ focus on recent interest rates as reference points may lead to choices of interest rate fixation periods which are inconsistent with normative predictions. A laboratory experiment reveals that borrowers prefer longer interest rate fixation periods when interest rates have fallen and shorter interest rate fixation periods when interest rates have risen. Normative drivers of interest rate fixation choice related to borrower characteristics, loan attributes, and pricing variables cannot explain these decisions. Market data from a mortgage broker confirms our findings in a context in which sound financial decisions are of prime importance for households’ financial well-being.

Suggested Citation

  • Lukas, Moritz & Nöth, Markus, 2021. "Interest rate fixation periods and reference points," Journal of Behavioral and Experimental Economics (formerly The Journal of Socio-Economics), Elsevier, vol. 94(C).
    • Handle: RePEc:eee:soceco:v:94:y:2021:i:c:s2214804321000513
    DOI: 10.1016/j.socec.2021.101711
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    More about this item

    Keywords

    Behavioral finance; Experimental finance; Credit; Mortgages;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • D12 - Microeconomics - - Household Behavior - - - Consumer Economics: Empirical Analysis
    • D14 - Microeconomics - - Household Behavior - - - Household Saving; Personal Finance
    • C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior

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