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Discounting in Mortgage Markets

Author

Listed:
  • Jason Allen
  • Robert Clark
  • Jean-François Houde

Abstract

This paper studies discounting in mortgage markets. Using transaction-level data on Canadian mortgages, we document that over time there’s been an increase in the average discount, along with substantial dispersion. The standard explanation for dispersion in credit markets is that lenders engage in risk-based pricing. Our setting is unique since contracts are guaranteed by government-backed insurance, meaning risk cannot be the main driver of dispersion. We find that mortgage rates depend on individual, contractual, and shopping market characteristics. There is also an important amount of unobserved heterogeneity in rates, which could be attributed to search costs.

Suggested Citation

  • Jason Allen & Robert Clark & Jean-François Houde, 2011. "Discounting in Mortgage Markets," Staff Working Papers 11-3, Bank of Canada.
  • Handle: RePEc:bca:bocawp:11-3
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    File URL: https://www.bankofcanada.ca/wp-content/uploads/2011/02/wp11-3.pdf
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    Citations

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    Cited by:

    1. Barrutia Legarreta, José María & Espinosa Alejos, María Paz, 2012. "Consumer Expertise or Credit Risk? An empirical analysis of mortgage pricing," DFAEII Working Papers 2012-04, University of the Basque Country - Department of Foundations of Economic Analysis II.
    2. Chris Stewart & Benn Robertson & Alexandra Heath, 2013. "Trends in the Funding and Lending Behaviour of Australian Banks," RBA Research Discussion Papers rdp2013-15, Reserve Bank of Australia.
    3. Jason Allen & Robert Clark & Jean-François Houde, 2012. "Price Competition and Concentration in Search and Negotiation Markets: Evidence from Mortgage Lending," Staff Working Papers 12-4, Bank of Canada.
    4. Jason Allen & Robert Clark & Jean-François Houde, 2012. "Price Negotiation in Differentiated Products Markets: Evidence from the Canadian Mortgage Market," Staff Working Papers 12-30, Bank of Canada.

    More about this item

    Keywords

    Financial institutions; Financial services;

    JEL classification:

    • D4 - Microeconomics - - Market Structure, Pricing, and Design
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • L0 - Industrial Organization - - General

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