ARM Wrestling: Valuing Adjustable Rate Mortgages Indexed to the Eleventh District Cost of Funds

This article analyzes adjustable rate mortgages (ARMs) based on the Eleventh District Cost of Funds Index (EDCOFI). The behavior of EDCOFI was examined over the period 1981–1993. Adjustments in this index lag substantially behind term structure fluctuations. Also, the seasonality and days-in-the-month effects noted by previous authors are really symptoms of a January effect . A finite difference valuation algorithm was developed which accounts for all usual ARM contractual features, in addition to the dynamics of EDCOFI. This pricing algorithm allows us to determine endogenously the optimal prepayment strategy for mortgage holders, and hence the value of their prepayment options. The dynamics of EDCOFI give significant value to this option, typically around 0.5% of the remaining principal on the loan.     

The Borrower's Choice of Fixed and Adjustable Rate Mortgages in the Presence of Nominal and Real Shocks

This paper concerns the conditions under which borrowers select fixed and adjustable rate mortgages. The novelty of the paper lies in its capability to analyze the effect of nominal and real shocks separately. The fixed rate mortgage (FRM) versus the adjustable rate mortgage (ARM) choice is determined by the expected real interest rate differential, initial wealth, income, expected real and nominal income risk exposure—measured by different parameters—the value of the house, the appreciation of the house and the influence of the variance of nominal and real shocks. Results differ according to whether or not borrowers are restricted by the loan-to-value constraint.     

Optimal Sharing of Interest‐Rate Risk in Mortgage Contracts: The Effects of Potential Prepayment and Default

Much of the literature on the economics of mortgage markets has studied the fixed vs. adjustable‐rate mortgage choice made by individual borrowers. However, to decide if the outcome of such a choice is efficient or approximately so, it is necessary to explore the question of optimal risk‐sharing in mortgage contracts. But because only a small literature has studied this question, more research is clearly warranted. The present article helps fill this gap by developing a simplified version of Arvan and Brueckner's model, using it to characterize optimal contracts in the absence of mortgage termination, and then exploring how termination via prepayment or default affects optimal risk‐sharing. The broad conclusion of the analysis is that potential mortgage termination makes higher risk exposure for borrowers optimal.     

New Evidence on Initial Transition from Career Job to Retirement in Japan

The interval in time between leaving a career job and exit from the labor force is especially long for Japanese employees. We examine determinants of post‐career work arrangements from two perspectives: work status and the route to a second job. We show that these determinants differ between male and female workers and that the customary function of career employers to place their workers in a second job has declined since the middle of the 1990s.     

Efficiency and Firm Ownership: Some New Evidence

The paper investigates the effect of state ownership on efficiency of firmsusing an econometric model that allows for the separation of technical from allocative efficiency in adynamic setting. The estimation results, based on a sample of international airlines, suggest that state ownershipis associated with lower technical and allocative efficiency. State ownership's effect on technical efficiencyis mainly a dynamic one – lowering the rate of cost decline, whereas its effect on allocativeefficiency is static – raising the level of costs. Thus lower technical, rather than allocative, efficiency isthe main reason for state-owned firms to be less efficient than their private counterparts.     

Barriers to real-time electricity pricing: Evidence from New Zealand

This paper studies the introduction of real-time electricity pricing in the New Zealand residential retail market to understand why its market share remained below 1.25%. We use rich panel data of all retail switches between 2014 and 2018 and an unexpected wholesale price spike to study adoption and attrition. Exploiting the staggered roll-out of real-time pricing in different locations we find that attrition decreases with experience. We also find that prospective adopters are present biased. The combination of these findings explains why adoption stalled and shows that wholesale price spikes pose a serious threat to widespread adoption of real-time pricing.     

Barriers to Mobility in Europe's Civil Aviation Markets: Theory and New Evidence

A questionnaire-based survey is applied to investigate the perception of mobilitybarriers by European airline managers. Whilst the liberalisation of Europe's airline markets removed regulatory mobility barriers, we find that mobility impediments still appear to exist. Potential entrants moreover, perceive some mobility barriers as significantly more effective than others. The perceived effectiveness of a particular mobility barrier varies considerably among airline managers. We also provide an overview of previous studies on the contestability hypothesis and the effectiveness of endogenous (strategic) mobility barriers. Our results support earlier findings for the U.S. to the effect that barriers to mobility are perceived to exist and matter. Whilst our results are clearly subjective, as they are based on the perceptions of managers, we believe such perceptions matter as they inform managerial actions. In this sensewe believe our results are of value.     

Risk perception in housing markets: Evidence from a fighter jet crash

In this study, we investigate the capitalization of flight accident risk in housing prices near military bases in Virginia from 2003 to 2016. We focus on a localized shock caused by a fighter jet crash into an apartment complex near the Naval Air Station Oceana in Virginia Beach. Although flight accident hazards were transparently disclosed by sellers and local governments years beforehand, the crash led to a temporary (approximately 3 years) decline in the prices of properties within accident potential zones (APZ) and by a lesser magnitude, properties slightly outside the APZ boundaries. This analysis sheds light on how market participants react after an extreme event, emphasizing the role of recency in the capitalization of risk.     

Apprenticeship Training and Day Release in UK Engineering: Some Cross-sectional Evidence

Cross-sectional evidence is presented on the determinants of the number of apprentices and employees on day release in a sample of UK engineering firms. Firm size, unionization, skill levels and turnover appear crucial for both measures of training.     

The Small Firm in a Quantity Choosing Game: Some Experimental Evidence

We demonstrate with a grim trigger strategy that the small firm should be more willing to collude tacitly as its market share declines; large firms should be less willing to cooperate. The small firm is not a maverick. The intensity of rivalry between two firms with asymmetric market shares is studied in experimental markets. Treatments give duopolists (1) 50% shares, (2) a 60 or 40% share, and (3) an 80 or 20% share. Choices for the small firm in the latter treatments are not significantly larger than the collusive choice. Irrespective of relative size, firms in all three market environments exhibit collusive behavior.     

Competition in Local Markets: Some Evidence from the Spanish Retail Banking Market

Using the entry threshold concept developed by Bresnahan and Reiss (Brookings Pap Econ Act 3:833–882, 1987), this paper examines how competitive conditions vary in independent local banking markets when the number of depository branches grows. With data on the Spanish retail banking sector in 2003, I estimate a discrete choice model to calculate the entry thresholds. The empirical evidence suggests that the entry of a new branch implies competition on a local level. Local branches seem to have some scope for changing prices fixed on national and regional levels. Moreover, the entry of new branches increases the competition among branches with instruments other than price (e.g., advertising, location, and promotion).      

Ownership Unbundling in Electricity Distribution: Empirical Evidence from New Zealand

New Zealand is the only country to date to have implemented forced ownership unbundling of electricity distribution from the rest of the electricity supply industry (in 1998). This paper examines the impact of this policy on electricity prices, quality of service and costs. We find that ownership unbundling did not achieve its objectives of facilitating greater competition in the electricity supply industry but that it did lead to lower costs and higher quality of service. We suggest that this experience indicates the potential benefits of ownership unbundling in Europe but also the danger of unintended consequences.     

The Risk Pyramid for New Product Development: An Application to Complex Aerospace Hardware

All new product developments are inherently characterized by risk, as a result of various uncertainties that surround them. Risk assessment techniques can be used to help clarify these uncertainties, as a basis for systematic decision making and organizational consensus. This article develops the risk pyramid, a new approach to risk assessment that dynamically combines concept assessments with multi-dimensional risk evaluations. William Souder and David Bethay illustrate the use of the risk pyramid with an application to SPACEHAB, a commercial space habitat module designed to enhance NASA's manned space program. The application illustrates the utility of risk assessment in general and the risk pyramid in particular. The results demonstrate how formally following the risk pyramid approach can potentially enhance the quality of new product decisions.     

Catch Animal Spirits in Auction: Evidence from New Zealand Property Market

Following the animal spirits theory proposed by Akerlof and Shiller, this article contributes to behavior economics by investigating the possibility of using auction sales data to capture evidence of irrational exuberance in the housing market. Using the monthly percentages of residential property auction sales for Auckland, Wellington and Christchurch regions in New Zealand from 2006 to 2015, and the exuberance testing method proposed by Phillips, Shi and Yu, we find that animal spirits have been developing in the Auckland housing market since 2013, but not in other regions. When compared to the results based on price‐to‐rent ratios, auction sales provide more meaningful results for identifying market‐wide irrational exuberance at an early stage. The causality test on price‐to‐rent ratios and auction sales volume shows that asset prices and animal spirits influence each other in the short run. In the long run, prices have significant effect on animal spirits, but not vice versa.     

Search Costs and Price Dispersion in a Localized,Homogeneous Product Market: Some Empirical Evidence

Convenience stores provide an opportunity to compare the price dispersion that occurs for gasoline, which is characterized by relatively low search and information costs to consumers, with that of in-store items, which are characterized by relatively high search and information costs to consumers. The results obtained from this study support the hypothesis that differences in search and information costs for consumers play a significant role in explaining the observed price dispersion that occurs for homogeneous items sold at convenience stores.