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Regressive Interest Rate Expectations and Mortgage Instrument Choice in the United Kingdom Housing Market
Author(s) -
Leece David
Publication year - 2001
Publication title -
real estate economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.064
H-Index - 61
eISSN - 1540-6229
pISSN - 1080-8620
DOI - 10.1111/1080-8620.00024
Subject(s) - economics , interest rate , nonparametric statistics , econometrics , portfolio , cash flow , financial economics , variable (mathematics) , mortgage underwriting , mean reversion , actuarial science , monetary economics , mortgage insurance , finance , mathematics , mathematical analysis , casualty insurance , insurance policy
The paper considers the choice of mortgage instrument when the rate of interest is fixed for a short duration, with reversion to a variable (bullet) rate mortgage contract. The research is the first direct test for regressive interest rate expectations using United Kingdom data while testing for wealth and portfolio effects. The econometric modeling uses a variety of nonparametric and parametric techniques to control for classification error in the dependent variable. There is evidence that households adopt regressive interest rate expectations. The lack of statistical significance of wealth and portfolio effects confirms the short run cash flow perspective of United Kingdom mortgage choices.