Expectations and interest rates on mortgage loans

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.An earlier version was presented at the annual meeting of theVerein für Socialpolitik 1994. We are grateful to Jürgen Wolters and an anonymous referee for their useful comments and suggestions.