Empirical Economics

, Volume 20, Issue 4, pp 667–680

Expectations and interest rates on mortgage loans

  • Kay Mitusch
  • Dieter Nautz
Article
  • 39 Downloads

Abstract

We examine the role of expectations for interest rates on mortgage loans. Our empirical results, based on cointegration tests, indicate a violation of the expectations hypothesis on the German loan market. In contrast to the capital market, a failure of the expectations hypothesis on the loan market cannot be attributed to the market segmentation hypothesis. Using a simple two-period model, we can show that the deviation from the expectations hypothesis is stronger than on the capital market and such that it confirms the common practice of choosing between loans with variable or fixed interest rates.

JEL Classification System-Numbers

E43 G21 C32 

Preview

Unable to display preview. Download preview PDF.

Unable to display preview. Download preview PDF.

References

  1. [1]
    Banerjee A, Dolado J, Hendry DF, Smith GW (1986) Exploring equilibrium relationships in econometrics through static models: Some Monte Carlo evidence. Oxford Bulletin of Economics and Statistics 48:253–277Google Scholar
  2. [2]
    Banerjee A, Dolado J, Galbraith JW, Hendry DF (1993) Cointegration, error correction, and the econometric analysis of non-stationary data. Oxford University PressGoogle Scholar
  3. [3]
    Banerjee A, Dolado J, Mestre R (1994) On the power of cointegration tests: Dimension invariance vs. common factors. MimeoGoogle Scholar
  4. [4]
    Brueckner JK, Follain JR (1988) The rise and fall of the ARM: An econometric analysis of mortgage choice. Review of Economics and Statistics 70:93–101Google Scholar
  5. [5]
    Campbell JY, Shiller RJ (1987) Cointegration and tests of present value models. Journal of Political Economy 95:1062–88Google Scholar
  6. [6]
    Campbell JY, Shiller RJ (1991) Yield spreads and interest rate movements: A bird's eye view. Review of Economic Studies 58:495–514Google Scholar
  7. [7]
    Culbertson JM (1957) The term structure of interest rates. Quarterly Journal of Economics 71:485–517Google Scholar
  8. [8]
    Dhillon US, Shilling JD, Sirmans CF (1987) Choosing between fixed and adjustable rate mortgages. Journal of Money, Credit, and Banking 19:260–267Google Scholar
  9. [9]
    Engle RF, Granger CWJ (1987) Cointegration and error correction: Representation, estimation and testing. Econometrica 55:251–276Google Scholar
  10. [10]
    Engle RF, Granger CWJ (1991) Long-run economic relationships. Oxford University PressGoogle Scholar
  11. [11]
    Hall AD, Anderson HM, Granger CWJ (1992) A cointegration analysis of Treasury bill yields. Review of Economics and Statistics 74:116–126Google Scholar
  12. [12]
    Johansen S (1988) Statistical analysis of cointegration vectors. Journal of Economic Dynamics and Control 12:231–254Google Scholar
  13. [13]
    Melino A (1988) The term structure of interest rates: Evidence and theory. Journal of Surveys 2:335–366Google Scholar
  14. [14]
    Nautz D, Wolters J (1995) Die Entwicklung langfristiger Kreditzinssätze: Eine empirische Analyse. Discussion paper, Free University of Berlin, Departments of Economics, 6. To appear in: Kredit und KapitalGoogle Scholar
  15. [15]
    Phillips PCB (1986) Understanding spurious regression in econometrics. Journal of Econometrics 33:311–40Google Scholar
  16. [16]
    Wolters J (1995a) On the term structure of interest rates: Empirical results for Germany. Statistical Papers 36:193–214Google Scholar
  17. [17]
    Wolters J (1950b) Kointegration und Zinsentwicklung im EWS: Eine Einführung in die Kointegrationsmethodologie und deren Anwendung. Allgemeines Statistisches Archiv 79: 146–169Google Scholar
  18. [18]
    Zhang H (1993) Treasury yield curves and cointegration. Applied Economics, 25:361–367Google Scholar

Copyright information

© Physica-Verlag 1995

Authors and Affiliations

  • Kay Mitusch
    • 1
  • Dieter Nautz
    • 1
  1. 1.Department of EconomicsFree University of BerlinBerlinGermany

Personalised recommendations