Movers and Shuckers: Interdependent Prepayment Decisions

We model competing risks of mortgage termination where the borrower faces a repeated choice to continue to pay, refinance the loan, move or default. Most previous empirical work on mortgage prepayment has ignored the distinction between prepayments triggered by refinancing and moving, combining them into a single prepayment rate. We show that financial considerations are the primary drivers of the refinance choice while homeowner characteristics have more influence on the move decision. We demonstrate that these differences are statistically significant and that combining these two distinct choices into a single measure of prepayment shifts coefficients toward zero and produces inaccurate predictions of aggregate termination rates. For example, a combined model underestimates the effect of the market price of the loan on refinancing; it misses entirely the opposite effects of borrower income on moving and refinancing. Our results suggest that existing prepayment models are inconsistent predictors of mobility-driven prepayment and underestimate the effect of market conditions and borrower characteristics on refinancing and housing decisions. Our findings have great significance to mortgage investors because mobility-driven prepayments are likely to be a more significant source of prepayments in thenext decade.     

Bank Risk Taking at the Onset of the Current Banking Crisis

We analyze bank governance, share ownership, CEO compensation, and bank risk taking in the period leading to the current banking crisis. Using a sample of large U.S. bank holding companies (BHCs), we find that BHCs with greater managerial control, achieved through various corporate governance mechanisms, take less risk. BHCs that pay CEOs high base salaries also take less risk, while BHCs that grant CEOs more in stock options or that pay CEOs higher bonuses take more risk. The evidence is generally consistent with BHC managers exhibiting greater risk aversion than outside shareholders, but with several factors affecting managers’ risk‐taking incentives.     

Assessing Nonlinear Dynamics of Central Bank Reaction Function: The Case of Mozambique

This paper sheds some light on the elements governing monetary policy‐making during the period 2000Q1–2015Q1 in Mozambique. We estimate a time‐varying Taylor‐type rule for the BM, using a Markov‐switching (MS) model and a Threshold model. The general finding is that the behaviour of the BM can be characterised by two regimes. In regime 1, only changes in inflation trigger a reaction by the monetary authority. This behaviour is prominent after the establishment of the monetary policy committee in 2007 (CPMO). In regime 2, the BM reacts aggressively both to cool off the economic activity and to curb inflationary pressures. Regime 2 occurred most frequently during 2000–2006, when the fiscal policy might have played an important role in output stabilization. After the establishment of the CPMO, regime 2 occurred in the context of a steep rise in fuel and food prices in 2007–2008 and in 2010. Both the MS model and the Threshold model show similar asymmetric effects. We find evidence that inflation is viewed more seriously by the monetary authorities when it is accompanied by a high output‐gap in the previous period, which triggers a more aggressive response from the monetary authorities.