Abstract
Data on approximately 280,000 borrowers from the UK Survey of Mortgage Lenders are used to model choices between variable and fixed rate mortgages. The choice is assumed to depend on three factors: risk attitude, interest-rate expectations, and individual discount rate. The ordered probit model is used for estimation, while taking account of a number of econometric issues including missing counterfactuals, selectivity, and endogeneity. A large number of strong effects are found, including: higher income borrowers are less risk averse and have a lower discount rate, and risk aversion rises with the amount borrowed, providing evidence of increasing relative risk aversion.
| Original language | English |
|---|---|
| Pages (from-to) | 1401-1426 |
| Number of pages | 26 |
| Journal | Journal of Money, Credit and Banking |
| Volume | 44 |
| Issue number | 7 |
| DOIs | |
| Publication status | Published - 1 Oct 2012 |
Keywords
- G20
- M13
- risky choice
- fixed and variable rate
- counterfactuals
- interest rate expectations
- discounting
- Ordered probit
- term structure