Heterogeneity in Mortgage Refinancing
By Julia Wu
Abstract
Many households who would benefit from and are eligible to refinance their mortgages fail to do so. A recent literature has demonstrated a significant degree of heterogeneity in the propensity to refinance across various dimensions, yet much heterogeneity is left unexplained. In this paper, I use a clustering regression to characterize heterogeneity in mortgage refinancing by estimating the distribution of propensities to refinance. A key novelty to my approach is that I do so without relying on borrower characteristics, allowing me to recover the full degree of heterogeneity, rather than simply the extent to which the propensity to refinance varies with a given observable. I then explore the role of both observed and unobserved heterogeneity in group placement by regressing group estimates on a set of demographic characteristics. As a complement to my analysis, I provide evidence from a novel dataset of detailed information on borrower perspectives on mortgage refinancing to paint a more nuanced picture of how household characteristics and behavioral mechanisms play into the decision to refinance. I find a significant degree of heterogeneity in both the average and marginal propensity to refinance across households. While observables such as education, race and income do significantly correlate with group heterogeneity, it is clear that much heterogeneity may still be attributed to the presence of unobservable characteristics.
Professor David Berger, Faculty Advisor
Professor Michelle Connolly, Faculty Advisor
JEL codes: D9, E52, G21
Inflation Expectations over the Life Cycle under Rational Inattention
by Jessica Schultz
Abstract
This paper explores how people track inflation over their lifetimes while facing tradeoffs between attention and certainty. It first employs a flexible modification of the Recursive Least Squares Learning approach from Malmendier and Nagel (MN) (2016) to find that households place weight on each inflation observation in a hump-shaped pattern over age when using past observations to set expectations about the future. This finding departs from MN, which models a strictly increasing weighting scheme with age. This paper then uses these findings to motivate a theory of Rational Inattention (RI) in inflation: as households age and accumulate wealth, their knowledge of the inflation rate becomes more important in their financial decisions–so they pay more attention to inflation. Consequently, as they decumulate wealth during their retirement, they have less reason to track inflation as accurately.
This paper subsequently formalizes this theory in a two-period RI model in which inflation-driven uncertainty in the interest rate between a working period and a retirement period can be reduced at a cost; this reduction in uncertainty occurs through observing an endogenously chosen signal that is correlated with the interest rate. It finds that as wealth increases before retirement, the optimal choice of signal precision increases as well. These findings help explain the hump-shaped weighting scheme for inflation observations in the empirical section, assuming changes in these weights over age are related in part to changes in household wealth. Ultimately, these findings suggest that monetary policy that focuses on long-term inflation stability or accounts for this heterogeneity may be most effective in anchoring consumer inflation expectations and increasing consumer welfare.
Professor Francesco Bianchi, Faculty Advisor
Professor Michelle Connolly, Faculty Advisor
JEL Codes: E2, E21, E31
Where Did the Money Go? Impact of the ECB’s Corporate Sector Purchase Program on Eurozone Corporate Spending
By Tina Tian
Slow corporate growth and a lack of corporate investment has plagued European markets for the past decade. As a response, the ECB began the Corporate Sector Purchase Program (CSPP) in 2016 to provide liquidity to corporate debt markets through bond purchases. Four years after the start of the program, this paper assesses its impact by looking at how companies spent this money on a micro level. In particular, it looks at the impact of long-term debt on five expenditures (fixed assets and R&D, cash balances, short-term debt, cash to shareholders, and share buybacks). We test these hypothesized expenditures based on financial statement panel data from a selection of European firms whose bonds were purchased by the ECB. The results show an increase in financial expenditures including cash balances and short-term debt and a decrease in productive investment expenditures such as fixed assets and R&D. This indicates a lack of efficacy of the corporate bond purchase program as excess liquidity provided by the ECB went towards eurozone companies refinancing existing debt rather than investing in growth ventures.
Advisors: Professor Connel Fullenkamp, Professor Kent Kimbrough | JEL Codes: G3, O16, E58
Immigrant Workers in a Changing Labor Environment: A study on how technology is reshaping immigrant earnings
By Grace Peterson
This research determines how automation affects immigrant wages in the US and how closely this impact follows the skills-biased technical change (SBTC) hypothesis. The present study addresses this question using American Community Survey (ACS) data from 2012 to 2016 and a job automation probability index to explain technological change. This research leverages OLS regressions to evaluate real wage drivers, grouping data by year, immigration status, and education level. According to the SBTC hypothesis, high skill immigrant wages should be less negatively affected by technological change than low skill immigrant wages. Univariate analysis suggests that the SBTC hypothesis is even stronger for US = immigrants than native-borns, as high skill immigrants have a lower average probability than low skill immigrants of having their jobs automated, and the difference in effect on high versus low skilled workers is larger for immigrant than native-borns. However, multivariate analysis asserts that technological change affects low skill immigrants’ wages less than high skilled individuals’ wages, which counters the SBTC hypothesis.
Advisors: Professor Grace Kim | JEL Codes: J15, J24, J31, J61, E24
Overreaction in the Financial Times Stock Exchange (FTSE)
By Yusuke Ewan Tanaka Legard
The Overreaction Hypothesis suggests that investors overreact to unexpected news in the financial world, which leads to a mispricing of equities. This paper investigates the presence of overreaction in the Financial Times Stock Exchange (FTSE) between 1995 and 2018. The empirical methodology studies the monthly returns of equities in the FTSE 100. The empirical results are consistent with the overreaction hypothesis and indicate the presence of overreaction within the FTSE. Furthermore, the results highlight whether the information revolution has exacerbated or lessened overreaction. The results suggest that investor overreaction has not altered, for better or worse, since the information revolution.
View Data (Email for Access)
Advisors: Professor Emma Rasiel, Professor Kent Kimbrough | JEL Codes: E7; E70; D83
The Impact of a Fixed Exchange Rate Regime on Growth and Volatility in an Oil-‐‑dependent Economy
By Shihab Osman Malik and Faisal Bandar Alsaadi
This study examines the relationship between the fixed exchange rate regime, economic growth, and output volatility in oil-‐‑producing Saudi Arabia over the post-‐‑Bretton Woods period (1973–2016). We assess the implications of the current exchange rate regime on macroeconomic and growth performance, and evaluate its sustainability in the context of oil-‐‑dependency and market dynamics. We develop and employ a theoretical framework and empirical specification based on previous literature to find that for Saudi Arabia, the fix is associated with faster growth and lower output volatility. We believe the result is primarily driven by the credibility of the fix in terms of establishing a strong nominal anchor and monetary policy framework.
Advisor: Lori Leachman | JEL Codes: E42, F31, F36, F41, O53
What Fosters Innovation? A CrossSectional Panel Approach to Assessing the Impact of Cross Border Investment and Globalization on Patenting Across Global Economies
By Michael Dessau and Nicholas Vega
This study considers the impact of foreign direct investment (FDI) on innovation in high income, uppermiddle income and lowermiddle income countries. Innovation matters because it is a critical factor for economic growth. In a panel setting, this study assesses the degree to which FDI functions as a vehicle for innovation as proxied by scaled local resident patent applications. This study considers research and development (R&D), domestic savings, imports and exports, and quality of governance as factors which could also impact the effectiveness of FDI on innovation. Our results suggest FDI is most effective as inward direct investment in countries outside the technological frontier possessing adequate existing domestic investment capital and R&D spending to convert foreign investment capital and technological spillover into innovation. Nonetheless, FDI was not a consistent indicator for innovation; rather, the most consistent indicators across this study were R&D and domestic savings. Differences amongst income groups are highlighted as well as their varying responses to our array of causal factors.
Advisor: Lori Leachman, Grace Kim, Michelle Connolly | JEL Codes: A10, B22, C82, E00, E02, O10, O11, O30, O31, O32, O33, O34, O43
Macroeconomic and Capital Market Determinants of Venture Capital Investment
By Jeffrey Zeren
This thesis explores the impact of macroeconomic, equity and credit market conditions on venture capital investment. The theoretical methodology outlines the logical foundation that supports the relationships between each explanatory variable and the supply and demand of venture financing. The hypotheses suggested by theory are tested using five multi-vector ordinary least squares regression that analyze the impact of the macroeconomic and capital market variables, after adjustment for multicollinaerity and overspecification bias, on each stage of venture capital investment. The next empirical strategy uses category variables and interaction terms to vastly expand the number of observations in the dataset and provide a more robust analysis of select variables. The results show that macroeconomic conditions associated with increased economic activity and productivity growth cause an increase in venture capital investment at all development stages, though early and late stage investments are the most sensitive to growth and productivity advances. In addition, strong public equity market valuations and initial public offering successes are positively associated with venture capital investments. Finally, optimism in credit markets are found to have an indirect impact on venture capital investment, through confounding factors related to investor and entrepreneurial confidence.
Advisors: Mary Beth Fisher, Michelle Connolly, Kent Kimbrough | JEL Codes: G2, G24, E44
The Puzzle of Mobile Money Markets: An Example of Goldilocks Conditions
By Ricardo Martínez-Cid and Gonzalo Pernas
This paper investigates the supply-side and demand-side factors that explain the success of mobile money markets. Namely, we argue that there exists a set of Goldilocks conditions that best supports mobile money services. A population must have exposure to financial services to understand mobile money and have a high enough level of income to have a use for these services. However, the population must also not have access to highly developed banking architecture, such that their banking needs are already satisfied. By comparing El Salvador and Kenya, countries in different stages of development, we find empirical support for our hypothesis. Our evidence suggests that low income regions and households with some exposure to financial services are more likely to use mobile money than fully banked people who enjoy a higher income.
Advisor: Michelle Connolly, Erica Field | JEL Codes: E40, E42, G21, G23, O12, O16, O17
The Investment Cost of Currency Crises in Emerging Markets: An Empirical Treatment from 1994-2015
By Eric Ramoutar
Currency crises – large and sudden depreciations in the value of a country’s currency – have been an unfortunate by-product of increased financial openness over the last half century. This study extends the already vast literature on the impact of currency crises by estimating how currency crises affect domestic investment in emerging markets. Specifically, the study uses panel data with fixed effects and various robust standard errors as well as a generalized method of moments estimator to investigate the impact of currency crises on domestic investment in a sample of 14 countries that experienced currency crises between 1994 and 2015 and 10 that did not. The results of the analysis initially indicate that, after controlling for a host of macroeconomic fundamentals, currency crises contribute significantly to dampened domestic investment. Ultimately, after controlling for banking crises, the study concludes that relatively severe, but not all, currency crises have a significant depressing effect on investment. The results further indicate that all currency crises should not be treated equally; those involving exceptionally large depreciations lead to an even greater decline in domestic investment.
Advisor: Cosmin Ilut, Kent Kimbrough, Lori Leachman | JEL Codes: E4, F3, F4, E42, F31, F32, F41, G01
