Interest rate volatility and home mortgage loans

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Abstract:

The US economy has experienced substantial fluctuations in real and nominal interest rates since the 1970s. This article investigates empirically the relationship between home mortgage loans and volatility in mortgage rates for the period 1971:02 to 2003:03. Contrary to common wisdom, we find a positive relationship between mortgage rate volatility and home mortgage loans. Further investigation indicates that this is due to volatility in the bond market. In times of high interest volatility, households disinvest in government securities and invest in real assets, which yields a positive relationship between mortgage rate volatility and home mortgage loans.

Document Type: Research Article

DOI: http://dx.doi.org/10.1080/00036840600949538

Affiliations: Department of Economics, Louisiana State University, Baton Rouge, LA 70803-6306, USA

Publication date: September 1, 2008

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