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.
David Berger, Faculty Advisor
Michelle Connolly, Faculty Advisor
JEL codes: D9, E52, G21
An Unequal Dream: The Mortgage Rate Premium Paid by Black Communities
By Michael Nicholson
This paper analyzes loan pricing discrimination against predominantly black communities in U.S. mortgage markets. Building on previous literature, this paper posits that ceteris paribus predominantly black communities continue to face economically significant discrimination in mortgage pricing. Ultimately, this paper concludes that predominantly black communities face 10-14 basis points of pricing discrimination in mortgage loans which corresponds to 12.6-17.6% higher rate spreads. This estimation comes after accounting for geographic and lender effects, borrower quality, tract-level characteristics, and loan type. These results confirm past findings of pricing discrimination and illustrate yet another financial barrier for black households in this country.
Advisors: Professor Emma Rasiel, Professor Kent Kimbrough | JEL Codes: R2, J15, G21
Investigating the Costs of Religious Observance: Cross-Country Analysis of Islamic Banking
By Myla Swallow and Richard Vargo
This study regresses key variables that influence the profitability of Conventional and Islamic banks as measured by Return on Average Assets, to determine the impact of Islamicity on the profitability of the banks in a given country. The study compares 36564 banks in 77 countries belonging to both Islamic and non-Islamic countries. We find that Islamic banks have higher operating costs and overall experience lower return on average assets.
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Advisors: Professor Kent Kimbrough, Professor Michelle Connolly | JEL Codes: F30; G21; Z12
Modeling Variation in U.S. Bank Holding Companies’ Net Interest Margins
By Daniel Dorchuck
This study explores variation in US bank holding companies’ (BHCs) net inter-est margins (NIMs) and the effects of interest rate risk exposure on NIMs. Interest rate risk (IRR) is intrinsic in maturity transformation and financial intermediation as banks take on short-term liabilities in the form of deposits and create assets in the form of loans with longer maturities and different repricing profiles. Accordingly, interest rate risk is necessary for bank holding companies (BHCs) to be profitable in financial intermediation, and net interest margins are chosen as a variable of inter-est because they are an isolated measure of bank’ profitability from interest earning assets. Naturally, BHCs employ maturity pairing and derivative hedging to mitigate IRR and ultimately increase and smooth earnings. Synthesizing banks’ balance sheet and income statement data, macroeconomic variables, credit conditions, and interest rate environment variables, this study hopes to expand on existing work by provid-ing insight on the determinants of NIMs as well as interest rate derivatives’ efficacy in increasing and stabilizing net interest margins. The models presented establish links between long term rate exposure, risk-averse capital positions, and increased margins. Additionally, the models suggest that banks earn smaller spreads (NIMs) in higher interest rate environments but benefit from steeper yield curves.
Advisor: Mary Beth Fisher, Kent Kimbrough | JEL Codes: E44, G20, G21 Tagged: Depository Institutions, Interest Rate Derivatives, Interest Rate Risk, Net Interest Margins, US Commercial Banking
How does being a Serial Creator affect Probability of Campaign Success on Kickstarter?
By Minn Khine
This paper seeks to address the issue of how being a serial creator impacts campaign success on Kickstarter. My hypothesis is that being a serial creator – someone who has created 2 or more projects on Kickstarter – has a positive effect on probability of campaign success but there are diminishing marginal returns to this effect. A regression analysis over a sample of over 187 thousand Kickstarter projects from its inception in 2008 until December 2014 yields the following findings, which supports my hypothesis. I found that being a serial creator does have a positive effect on campaign success but there is diminishing marginal returns to being a serial creator. Furthermore, number of updates, number of reward levels, having a video, number of backers, FB Shares, FB Friends, and Number of Projects Backed all have positive effects on campaign success. On the other hand, comments, funding goal, and duration have negative effects on campaign success. The effect of the Fed Fund Rate on campaign success is inconclusive. In terms of how project characteristics and creator characteristics affect first time creators and serial creators differently, I found that Updates, Video, FBShares, FBFriends, and Goal matter less as number of projects created increases, in other words, for serial creators who’ve gathered more project experience. On the other hand, Rewards, Backers, ProjectsBacked, Comments, and Duration matter more as number of projects created increases.
Advisor: Edward Tower, Grace Kim | JEL Codes: G21, G24, L26 | Tagged: Crowdfunding, Kickstarter, Serial creator
The Effect of Minority History on Racial Disparities in the Mortgage Market: A Case Study of Durham and New Haven
By Jisoo Yoon
In the aftermath of the housing market crash, the concentration of subprime mortgage loans in minority neighborhoods is a current and long-standing issue. This study investigates the presence of racial disparities in mortgage markets by examining two cities with contrasting histories of African American and Hispanic establishment: Durham, North Carolina and New Haven, Connecticut. This study examines data by the Home Mortgage Disclosure Act (HMDA), and distills the effect of minority legacy on the perception of racial risk by using econometric instruments to separate the behavior of national lenders and local lenders. The econometric methods allow national lenders to reflect objective risk measures and neighborhood race dynamics, while local lenders reflect subjective attitudes towards certain races. With its longer history of African American presence, Durham shows a positive attitude towards Black borrowers at the local level, while New Haven shows a more favorable attitude towards its Hispanic residents. Nonetheless, racial legacy also materializes as a negative factor in the form of increased residential segregation and spillover effects. Furthermore, a temporal variation analysis of pre- and post-mortgage market reform data affirms the disappearance of racial bias and continued presence of spillover risk in Durham.
Advisor: Christopher Timmins | JEL Codes: C01, G21, J15, R21, R23, R31 | Tagged: Econometrics, Mortgages, Economics of Minorities, Races, Census, Migration, Population, Neighborhood Characteristics, Housing Supply and Market
Word-of-Mouth Effects in the Holdings and Trading Activities among Canadian Mutual Fund Managers
By Chang Liu
The study tests the word-of-mouth effects among mutual fund managers in Canada with methodology based on a previous study (Hong et al., 2005), with multiple modifications to it such as the method to locate the mutual fund managers. The results confirm the original findings yet with unexpected outcomes. This study demonstrates smaller word-of-mouth effects compared to the original study and reverse word-of-mouth effects in the largest financial city of Canada. The possible interpretations are further discussed in detail, among which a dynamic model of word-of-mouths effects and product differentiation is introduced. The study also discusses the market structure’s possible implications on such dynamic models.
Advisor: Jia Li | JEL Codes: G02, G15, G20, G21 | Tagged: Word-of-Mouth, Product Differentiation, Herding Behavior
Understanding SME Finance: Determinants of Relationship Lending
By Sean Suk Hyun
Much of the existing literature in small and medium-sized enterprise (SME) finance surveys the impact of borrower and lender characteristics on firms’ credit availability, and it has already been established that there is a link between strong firm-bank relationship and higher level of credit availability. In this paper, I focus on what determines the strength of relationship, measured by length and exclusivity. In particular, I was able to build an original metric to gauge the strength of relationship using the inverse value of the number of financial institution that a firm deals with. Using a set of regressions, I confirm the existing theories that size of the firm and type of ownership matters. Small firms and sole proprietorships tend to have longer and more exclusive relationships, which implies their reliance on relationship lending. Firm owner characteristics are shown to be somewhat important, in that it serves as proxies for a given firm’s creditworthiness.
Advisor: Grace Kim, Michelle Connolly | JEL Codes: G02, G21, G30, L14 | Tagged: Asymmetrical information, Credit Rationing, Relationship Lending, SME Finance
The Rise of Mobile Money in Kenya: The Changing Landscape of M-PESA’s Impact on Financial Inclusion
By Hong Zhu
M-PESA, the hugely popular mobile money system in Kenya, has been celebrated for its potential to “bank the unbanked” and increase access to financial services. This paper provides evidence to support this idea and explores mechanisms through which this might be the case. It specifically looks at the savings products held by individuals and how this changes in relation to M-PESA use. It then constructs an index for measuring the extent to which individuals are integrated into the formal financial sector. This paper argues that M-PESA’s effect on financial inclusion is a growing phenomenon, which suggests that keeping pace with the rapid evolutions of this mobile money system should be a high priority for researchers. As this paper elucidates, M-PESA has become notably more integrated with the formal financial sector in 2013 as compared to 2009, which holds implications for user behavior.
Advisor: Michelle Connolly, Xiao Yu Wang | JEL Codes: D14, E42, G21, G23, O1, O17, O16, O33 | Tagged: Financial Inclusion, Mobile Money, Savings,Technology
The Impact of Population Mobility on repayment Rates in Microfinance Institutions
By Allison Vernerey
Several studies have attempted to model the determinants of repayment rates for group-based loans administered by micro-finance institutions (MFIs). One of the main variables that have been identifies as playing a role in determining the repayment rate is social capital. Empirical research however has struggled with quantifying this qualitative variable, resulting in vast inconsistencies across studies, aggravating cross-comparison and objective interpretation. Instead, we argue that the use of quantitative, cross-country comparable proxy that is intuitively linked to social capital would yield more consistent and reliable results. We hypothesize that population mobility is such a proxy, and that lower population mobility correlates positively with higher social capital and thus higher repayment rates. Using population mobility as a proxy for social capital would allow MFIs to lower their cost of data collection for performance assessments and simplify the process for policy makers trying to evaluate the programs success. At the village level, we find significant evidence that higher emigration within a community is strongly linked to lower repayment rates in micro-finance. These results provide micro-finance institutions with a new and more cost effective way to monitor their performance as well as improve their capacity to make well-informed lending decisions.
Advisor: Genna Miller | JEL Codes: G, G2, G21 | Tagged: Bangladash, Microfinance Institutions, Population Mobility, Repayment Rates, Social Capital
