The authors wish to express grateful thanks to the editor and two anonymous referees for suggestions that have led to significant enhancements to the paper. They also wish to thank Dan Houser, Glenn Harrison, and other participants at the CEAR Workshop (Econometrics of Choice Under Risk and Over Time) in Denver in January 2011, for useful comments. The first author gratefully acknowledges sponsorship from the ESRC under studentship PTA-031-2004-00221. Data available from the UK Data Archive at Essex University: http://www.data-archive.ac.uk. The standard disclaimer applies.
Mortgage Choice as a Natural Field Experiment on Choice under Risk
Article first published online: 19 SEP 2012
© 2012 The Ohio State University
Journal of Money, Credit and Banking
Volume 44, Issue 7, pages 1401–1426, October 2012
How to Cite
BACON, P. M. and MOFFATT, P. G. (2012), Mortgage Choice as a Natural Field Experiment on Choice under Risk. Journal of Money, Credit and Banking, 44: 1401–1426. doi: 10.1111/j.1538-4616.2012.00537.x
- Issue published online: 19 SEP 2012
- Article first published online: 19 SEP 2012
- Received February 28, 2011; and accepted in revised form February 7, 2012.
- risky choice;
- fixed and variable rate mortgages;
- interest rate expectations;
- ordered probit;
- term structure
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.