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Houses as ATMs: Mortgage Refinancing and Macroeconomic Uncertainty
Author(s) -
CHEN HUI,
MICHAUX MICHAEL,
ROUSSANOV NIKOLAI
Publication year - 2020
Publication title -
the journal of finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 18.151
H-Index - 299
eISSN - 1540-6261
pISSN - 0022-1082
DOI - 10.1111/jofi.12842
Subject(s) - market liquidity , leverage (statistics) , economics , monetary economics , equity (law) , balance sheet , interest rate , home equity , econometrics , finance , machine learning , computer science , law , political science
ABSTRACT Mortgage refinancing activity associated with extraction of home equity contains a strongly countercyclical component consistent with household demand for liquidity. We estimate a structural model of liquidity management featuring countercyclical idiosyncratic labor income uncertainty, long‐ and short‐term mortgages, and realistic borrowing constraints. We empirically evaluate its predictions for households' choices of leverage, liquid assets, and mortgage refinancing using microlevel data. Taking the observed historical paths of house prices, aggregate income, and interest rates as given, the model accounts for many salient features in the evolution of balance sheets and consumption in the cross‐section of households over 2001 to 2012.