This file is part of IDEAS, which uses RePEc data


[ Papers | Articles | Software | Books | Chapters | Authors | Institutions | JEL Classification | NEP reports | Search | New papers by email | Author registration | Rankings | Volunteers | FAQ | Blog | Help! ]

Household Risk Management and Optimal Mortgage Choice

Author info | Abstract | Publisher info | Download info | Related research | Statistics
Author Info
John Y. Campbell
Joao F. Cocco

Additional information is available for the following registered author(s):

Abstract

Home mortgages are the most significant financial contract for many households. The form of this contract is correspondingly important. This paper studies the choice between fixed-rate (FRM) and adjustable-rate (ARM) mortgages. In an environment with uncertain inflation, nominal FRMs have risky real capital value whereas ARMs have safe capital value. However ARMs can greatly increase the short-term variability of required real interest payments. This is a serious disadvantage of ARMs for households who face borrowing constraints and have only a small buffer stock of financial assets. The paper uses numerical methods to solve a life-cycle model with risky labor income and borrowing constraints, under alternative assumptions about available mortgage contracts. Households with large mortgages, risky labor income, high risk aversion, and a low probability of moving are more likely to prefer nominal FRMs. The paper also considers inflation-indexed FRMs. These mortgages remove the wealth risk of nominal FRMs without incurring the income risk of ARMs, and therefore are a superior vehicle for household risk management. The paper finds that the welfare gains of mortgage indexation can be very large.

Download Info
To download:

If you experience problems downloading a file, check if you have the proper application to view it first. Information about this may be contained in the File-Format links below. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

File URL: http://www.economics.harvard.edu/pub/hier/2002/HIER1946.pdf
File Format: application/pdf
File Function:
Download Restriction: no

Publisher Info
Paper provided by Harvard - Institute of Economic Research in its series Harvard Institute of Economic Research Working Papers with number 1946.

Download reference. The following formats are available: HTML (with abstract), plain text (with abstract), BibTeX, RIS (EndNote, RefMan, ProCite), ReDIF
Length:
Date of creation: 2002
Date of revision:
Handle: RePEc:fth:harver:1946

Contact details of provider:
Postal: 200 Littauer Center, Cambridge, MA 02138
Web page: http://www.economics.harvard.edu/journals/hier
More information through EDIRC

For technical questions regarding this item, or to correct its listing, contact: (Thomas Krichel).

Related research
Keywords:

Other versions of this item:

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Black, Deborah G & Garbade, Kenneth D & Silber, William L, 1981. "The Impact of the GNMA Pass-through Program on FHA Mortgage Costs," Journal of Finance, American Finance Association, vol. 36(2), pages 457-69, May. [Downloadable!] (restricted)
  2. Merton, Robert C, 1973. "An Intertemporal Capital Asset Pricing Model," Econometrica, Econometric Society, vol. 41(5), pages 867-87, September. [Downloadable!] (restricted)
  3. MaCurdy, Thomas E., 1982. "The use of time series processes to model the error structure of earnings in a longitudinal data analysis," Journal of Econometrics, Elsevier, vol. 18(1), pages 83-114, January. [Downloadable!] (restricted)
  4. Christopher D. Carroll, 1996. "Buffer-Stock Saving and the Life Cycle/Permanent Income Hypothesis," NBER Working Papers 5788, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  5. Rothberg, James P & Nothaft, Frank E & Gabriel, Stuart A, 1989. "On the Determinants of Yield Spreads between Mortgage Pass-Through and Treasury Securities," The Journal of Real Estate Finance and Economics, Springer, vol. 2(4), pages 301-15, December.
  6. Todd Sinai & Nicholas S. Souleles, 2003. "Owner-Occupied Housing as a Hedge Against Rent Risk," NBER Working Papers 9462, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  7. Zeldes, Stephen P, 1989. "Optimal Consumption with Stochastic Income: Deviations from Certainty Equivalence," The Quarterly Journal of Economics, MIT Press, vol. 104(2), pages 275-98, May. [Downloadable!] (restricted)
    Other versions:
  8. Jagannathan, Ravi & Wang, Zhenyu, 1996. " The Conditional CAPM and the Cross-Section of Expected Returns," Journal of Finance, American Finance Association, vol. 51(1), pages 3-53, March. [Downloadable!] (restricted)
    Other versions:
  9. Christopher D. Carroll, 1992. "The Buffer-Stock Theory of Saving: Some Macroeconomic Evidence," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 23(1992-2), pages 61-156. [Downloadable!]
  10. Goetzmann, W.N., 1990. "The Single Family Home In The Investment Portfolio," Papers fb-_90-15, Columbia - Graduate School of Business.
    Other versions:
  11. John Y. Campbell & Luis M. Viceira, 2001. "Who Should Buy Long-Term Bonds?," American Economic Review, American Economic Association, vol. 91(1), pages 99-127, March. [Downloadable!] (restricted)
    Other versions:
  12. Tauchen, George & Hussey, Robert, 1991. "Quadrature-Based Methods for Obtaining Approximate Solutions to Nonlinear Asset Pricing Models," Econometrica, Econometric Society, vol. 59(2), pages 371-96, March. [Downloadable!] (restricted)
  13. Brueckner, Jan K & Follain, James R, 1988. "The Rise and Fall of the ARM: An Econometric Analysis of Mortgage Choice," The Review of Economics and Statistics, MIT Press, vol. 70(1), pages 93-102, February. [Downloadable!] (restricted)
  14. Fratantoni, Michael C, 2001. "Homeownership, Committed Expenditure Risk, and the Stockholding Puzzle," Oxford Economic Papers, Oxford University Press, vol. 53(2), pages 241-59, April.
  15. Statman, Meir, 1982. "Fixed Rate or Index-Linked Mortgages from the Borrower's Point of View: A Note," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 17(03), pages 451-457, September. [Downloadable!]
  16. Campbell, John Y & Ammer, John, 1993. " What Moves the Stock and Bond Markets? A Variance Decomposition for Long-Term Asset Returns," Journal of Finance, American Finance Association, vol. 48(1), pages 3-37, March. [Downloadable!] (restricted)
    Other versions:
  17. Campbell, John Y & Shiller, Robert J, 1991. "Yield Spreads and Interest Rate Movements: A Bird's Eye View," Review of Economic Studies, Blackwell Publishing, vol. 58(3), pages 495-514, May. [Downloadable!] (restricted)
    Other versions:
  18. Richard Clarida & Jordi Galí & Mark Gertler, 2000. "Monetary Policy Rules And Macroeconomic Stability: Evidence And Some Theory," The Quarterly Journal of Economics, MIT Press, vol. 115(1), pages 147-180, February. [Downloadable!] (restricted)
    Other versions:
  19. Andrew Caplin & Sewin Chan & Charles Freeman & Joseph Tracy, 1997. "Housing Partnerships: A New Approach to a Market at a Crossroads," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262032430, January.
  20. Kjetil Storesletten & Chris Telmer & Amir Yaron, 1997. "Consumption and risk sharing over the life cycle," GSIA Working Papers 228, Carnegie Mellon University, Tepper School of Business. [Downloadable!]
    Other versions:
  21. Luis M. Viceira, 1999. "Optimal Portfolio Choice for Long-Horizon Investors with Nontradable Labor Income," NBER Working Papers 7409, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  22. Schwartz, Eduardo S & Torous, Walter N, 1989. " Prepayment and the Valuation of Mortgage-Backed Securities," Journal of Finance, American Finance Association, vol. 44(2), pages 375-92, June. [Downloadable!] (restricted)
  23. Fama, Eugene F., 1990. "Term-structure forecasts of interest rates, inflation and real returns," Journal of Monetary Economics, Elsevier, vol. 25(1), pages 59-76, January. [Downloadable!] (restricted)
  24. Abowd, John M & Card, David, 1989. "On the Covariance Structure of Earnings and Hours Changes," Econometrica, Econometric Society, vol. 57(2), pages 411-45, March. [Downloadable!] (restricted)
    Other versions:
  25. Deaton, Angus, 1991. "Saving and Liquidity Constraints," Econometrica, Econometric Society, vol. 59(5), pages 1221-48, September. [Downloadable!] (restricted)
    Other versions:
  26. Pierre-Olivier Gourinchas & Jonathan A. Parker, 2002. "Consumption Over the Life Cycle," Econometrica, Econometric Society, vol. 70(1), pages 47-89, January. [Downloadable!] (restricted)
    Other versions:
  27. Jonathan Skinner, 1991. "Housing and Saving in the United States," NBER Working Papers 3874, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  28. Stanton, Richard, 1995. "Rational Prepayment and the Valuation Mortgage-Backed Securities," Review of Financial Studies, Oxford University Press for Society for Financial Studies, vol. 8(3), pages 677-708. [Downloadable!] (restricted)
  29. Bertaut, Carol C. & Haliassos, Michael, 1997. "Precautionary portfolio behavior from a life-cycle perspective," Journal of Economic Dynamics and Control, Elsevier, vol. 21(8-9), pages 1511-1542, June. [Downloadable!] (restricted)
    Other versions:
  30. Chan, Sewin, 2001. "Spatial Lock-in: Do Falling House Prices Constrain Residential Mobility?," Journal of Urban Economics, Elsevier, vol. 49(3), pages 567-586, May. [Downloadable!] (restricted)
  31. Mishkin, Frederic S., 1990. "What does the term structure tell us about future inflation?," Journal of Monetary Economics, Elsevier, vol. 25(1), pages 77-95, January. [Downloadable!] (restricted)
    Other versions:
  32. Caplin, Andrew & Freeman, Charles & Tracy, Joseph, 1997. "Collateral Damage: Refinancing Constraints and Regional Recessions," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 29(4), pages 496-516, November.
  33. Joseph Tracy & Henry Schneider, 2001. "Stocks in the household portfolio: a look back at the 1990s," Current Issues in Economics and Finance, Federal Reserve Bank of New York, issue Apr. [Downloadable!]
  34. Brueckner Jan K., 1994. "Borrower Mobility, Adverse Selection, and Mortgage Points," Journal of Financial Intermediation, Elsevier, vol. 3(4), pages 416-441, September. [Downloadable!] (restricted)
    Other versions:
  35. Kearl, J R, 1979. "Inflation, Mortgages, and Housing," Journal of Political Economy, University of Chicago Press, vol. 87(5), pages 1115-38, October. [Downloadable!] (restricted)
  36. Ortalo-Magné, François & Rady, Sven, 2001. "Housing Market Dynamics: On the Contribution of Income Shocks and Credit Constraints," CEPR Discussion Papers 3015, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
    Other versions:
  37. Peter Gottschalk & Robert Moffitt, 1994. "The Growth of Earnings Instability in the U.S. Labor Market," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 25(1994-2), pages 217-272. [Downloadable!]
  38. Shiller, Robert J & Weiss, Allan N, 1999. "Home Equity Insurance," The Journal of Real Estate Finance and Economics, Springer, vol. 19(1), pages 21-47, July. [Downloadable!] (restricted)
    Other versions:
  39. John Y. Campbell & Robert J. Shiller, 1996. "A Scorecard for Indexed Government Debt," Cowles Foundation Discussion Papers 1125, Cowles Foundation, Yale University. [Downloadable!]
    Other versions:
  40. Case, Karl E & Shiller, Robert J, 1989. "The Efficiency of the Market for Single-Family Homes," American Economic Review, American Economic Association, vol. 79(1), pages 125-37, March. [Downloadable!] (restricted)
    Other versions:
  41. Chari, V V & Jagannathan, Ravi, 1989. " Adverse Selection in a Model of Real Estate Lending," Journal of Finance, American Finance Association, vol. 44(2), pages 499-508, June. [Downloadable!] (restricted)
  42. Joseph Tracy & Henry Schneider & Sewin Chan, 1999. "Are stocks overtaking real estate in household portfolios?," Current Issues in Economics and Finance, Federal Reserve Bank of New York, issue Apr. [Downloadable!]
  43. John Y. Campbell & João F. Cocco & Francisco J. Gomes & Pascal J. Maenhout, 2001. "Investing Retirement Wealth: A Life-Cycle Model," NBER Chapters, in: Risk Aspects of Investment-Based Social Security Reform, pages 439-482 National Bureau of Economic Research, Inc. [Downloadable!]
    Other versions:
  44. John Heaton & Deborah Lucas, 2000. "Portfolio Choice and Asset Prices: The Importance of Entrepreneurial Risk," Journal of Finance, American Finance Association, vol. 55(3), pages 1163-1198, 06. [Downloadable!] (restricted)
  45. Kjetil Storesletten & Chris Telmer & Amir Yaron, 1996. "Asset Pricing with Idiosyncratic Risk and Overlapping Generations," Economics Working Papers 405, Department of Economics and Business, Universitat Pompeu Fabra, revised Jul 1999. [Downloadable!]
    Other versions:
  46. Fama, Eugene F. & Schwert, G. William, 1977. "Human capital and capital market equilibrium," Journal of Financial Economics, Elsevier, vol. 4(1), pages 95-125, January. [Downloadable!] (restricted)
  47. Richard Roll, 2003. "Empirical TIPs," University of California at Los Angeles, Anderson Graduate School of Management 1032, Anderson Graduate School of Management, UCLA. [Downloadable!]
  48. LeRoy, Stephen F, 1996. "Mortgage Valuation under Optimal Prepayment," Review of Financial Studies, Oxford University Press for Society for Financial Studies, vol. 9(3), pages 817-44. [Downloadable!] (restricted)
  49. Alm, James & Follain, James R., 1984. "Alternative Mortgage Instruments, the Tilt Problem, and Consumer Welfare," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 19(01), pages 113-126, March. [Downloadable!]
  50. Richard Stanton & Nancy Wallace, 1998. "Mortgage Choice: What's the Point?," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 26(2), pages 173-205. [Downloadable!] (restricted)
  51. Fama, Eugene F, 1975. "Short-Term Interest Rates as Predictors of Inflation," American Economic Review, American Economic Association, vol. 65(3), pages 269-82, June. [Downloadable!] (restricted)
  52. Stanton, Richard & Wallace, Nancy, 1999. "Anatomy of an ARM: The Interest-Rate Risk of Adjustable-Rate Mortgages," The Journal of Real Estate Finance and Economics, Springer, vol. 19(1), pages 49-67, July. [Downloadable!] (restricted)
  53. Dunn, Kenneth B & Spatt, Chester S, 1985. " An Analysis of Mortgage Contracting: Prepayment Penalties and the Due-on-Sale Clause," Journal of Finance, American Finance Association, vol. 40(1), pages 293-308, March. [Downloadable!] (restricted)
  54. Carroll, Christopher D. & Samwick, Andrew A., 1997. "The nature of precautionary wealth," Journal of Monetary Economics, Elsevier, vol. 40(1), pages 41-71, September. [Downloadable!] (restricted)
    Other versions:
  55. Garcia, Rene & Perron, Pierre, 1996. "An Analysis of the Real Interest Rate under Regime Shifts," The Review of Economics and Statistics, MIT Press, vol. 78(1), pages 111-25, February. [Downloadable!] (restricted)
    Other versions:
  56. Marjorie Flavin & Takashi Yamashita, 2002. "Owner-Occupied Housing and the Composition of the Household Portfolio," American Economic Review, American Economic Association, vol. 92(1), pages 345-362, March. [Downloadable!]
Full references

Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)
This item has more than 25 citations. To prevent cluttering this page, these citations are listed on a separate page.
Statistics
Access and download statistics

Did you know? RePEc also has a blog.

This page was last updated on 2009-11-5.

This information is provided to you by IDEAS at the Department of Economics, College of Liberal Arts and Sciences, University of Connecticut using RePEc data on a server sponsored by the Society for Economic Dynamics.