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Modelling Mortgage Rate Changes with a Smooth Transition Error-Correction Model

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  • Ying Liu

Abstract

This paper uses a smooth transition error-correction model (STECM) to model the one-year and five-year mortgage rate changes. The model allows for a non-linear adjustment process of mortgage rates towards their long-run equilibrium. We also introduce time-varying thresholds into the standard STECM specification, to capture the gradual structural changes in the error-correction term. We find that the STECM, whether with fixed or time-varying thresholds, yields better in-sample fit and lower forecast errors than the linear benchmark and univariate models. Our estimation results indicate non-linearities in the adjustment process of mortgage rates towards their long-run equilibria. In particular, we find that mortgage rates respond more significantly to a large than to a small disequilibrium. The improvement of the STECMs in forecasting is statistically significant over the univariate models, but insignificant over the linear model.

Suggested Citation

  • Ying Liu, 2001. "Modelling Mortgage Rate Changes with a Smooth Transition Error-Correction Model," Staff Working Papers 01-23, Bank of Canada.
  • Handle: RePEc:bca:bocawp:01-23
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    References listed on IDEAS

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    1. Johansen, Soren & Juselius, Katarina, 1990. "Maximum Likelihood Estimation and Inference on Cointegration--With Applications to the Demand for Money," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 52(2), pages 169-210, May.
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    5. Eichengreen, Barry & Watson, Mark W & Grossman, Richard S, 1985. "Bank Rate Policy under the Interwar Gold Standard: A Dynamic Probit Model," Economic Journal, Royal Economic Society, vol. 95(379), pages 725-745, September.
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    Cited by:

    1. Arouri, Mohamed & Jawadi, Fredj & Nguyen, Duc Khuong, 2013. "What can we tell about monetary policy synchronization and interdependence over the 2007–2009 global financial crisis?," Journal of Macroeconomics, Elsevier, vol. 36(C), pages 175-187.
    2. Tripe, David & Xia, Bingru & Roberts, Leigh, 2011. "Can implied forward mortgage rates predict future mortgage rates - recent New Zealand experience," Working Paper Series 1986, Victoria University of Wellington, School of Economics and Finance.
    3. Jack R. Rogers, 2013. "Monetary Transmission to UK Retail Mortgage Rates before and after August 2007," Discussion Papers 1307, Exeter University, Department of Economics.
    4. Kieran Farrelly & Ben Sanderson, 2005. "Modelling Regime Shifts in the City of London Office Rental Cycle," Journal of Property Research, Taylor & Francis Journals, vol. 22(4), pages 325-344, December.
    5. Fredj Jawadi & Georges Prat, 2012. "Arbitrage costs and nonlinear adjustment in the G7 stock markets," Applied Economics, Taylor & Francis Journals, vol. 44(12), pages 1561-1582, April.
    6. Michael Sager, 2006. "Explaining the persistence of deviations from PPP: a non-linear Harrod-Balassa-Samuelson effect?," Applied Financial Economics, Taylor & Francis Journals, vol. 16(1-2), pages 41-61.

    More about this item

    Keywords

    Econometric and statistical methods; Interest rates;

    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • C49 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics - - - Other
    • E47 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Forecasting and Simulation: Models and Applications

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