Essays on Household Finance and Credit Markets PDF Download
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Author: Albert Zevelev
Publisher:
ISBN:
Category :
Languages : en
Pages : 362
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Book Description
The US housing boom was accompanied by a rise in mortgage leverage. The subsequent bust was accompanied by a rise in foreclosure. This paper introduces a dynamic general equilibrium model to study how leverage and foreclosure affect house prices. The model shows how foreclosure sales, through their effect on housing supply, amplify and propagate house price drops. A calibration to match the bust shows consumption and housing need to be sufficiently complementary to fit the data. Since leverage plays a key role in foreclosure, a regulator can reduce systemic risk by placing a cap on leverage. Counterfactual experiments show that in a world with less leverage, the same economic shock leads to less foreclosure and less severe, shorter busts in house prices. A 90% cap on loan-to-value ratios in 2006 predicts house prices would have fallen 12% rather than 18% as in the data. The regulator faces a trade-off in that less leverage means less housing for constrained households, but also fewer foreclosures and less severe busts in house prices. A regulator with reasonable preference parameters would choose a cap of 95%.
Author: Albert Zevelev
Publisher:
ISBN:
Category :
Languages : en
Pages : 362
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Book Description
The US housing boom was accompanied by a rise in mortgage leverage. The subsequent bust was accompanied by a rise in foreclosure. This paper introduces a dynamic general equilibrium model to study how leverage and foreclosure affect house prices. The model shows how foreclosure sales, through their effect on housing supply, amplify and propagate house price drops. A calibration to match the bust shows consumption and housing need to be sufficiently complementary to fit the data. Since leverage plays a key role in foreclosure, a regulator can reduce systemic risk by placing a cap on leverage. Counterfactual experiments show that in a world with less leverage, the same economic shock leads to less foreclosure and less severe, shorter busts in house prices. A 90% cap on loan-to-value ratios in 2006 predicts house prices would have fallen 12% rather than 18% as in the data. The regulator faces a trade-off in that less leverage means less housing for constrained households, but also fewer foreclosures and less severe busts in house prices. A regulator with reasonable preference parameters would choose a cap of 95%.
Author: Alexander Calen Aberlin Kaufman
Publisher:
ISBN:
Category :
Languages : en
Pages : 312
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Book Description
This dissertation presents three essays on household finance. All three focus on contemporary U.S. consumer credit markets, with particular attention paid to how market organization and firm incentives mediate the way firms interact with customers and the types of contracts they offer. The first essay examines the question of whether securitization was responsible for poor underwriting standards during the recent mortgage crisis. The second essay attempts to quantify the effect of Fannie Mae and Freddie Mac's intervention in the conforming mortgage market on equilibrium outcomes such as price and contract structure. The third essay investigates how mutual ownership of a firm by its customers can limit that firm's incentive to offer contracts meant to take advantage of customers' behavioral biases.
Author: Scott Thomas Nelson
Publisher:
ISBN:
Category :
Languages : en
Pages : 189
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Book Description
This thesis consists of three chapters on household finance and regulatory policy in consumer credit markets. The first chapter studies the efficiency and distributional effects of credit card pricing restrictions in the 2009 Credit CARD Act. I document how two forces drive these restrictions' effects: first, the Act constrains lenders from adjusting interest rates in response to new information about default risk, which exacerbates adverse retention of risky borrowers and induces partial market unraveling on new accounts; second, the Act constrains lenders from pricing private information about demand, which reduces markups on inelastic borrowers. I develop a structural model of the US credit card market to study how heightened information problems and lower markups interact in equilibrium to determine the Act's effects. I find that equilibrium market unraveling is most severe for subprime consumers, but the reduction in markups is substantial throughout the market, so that on net, the Act's restrictions allow consumers of all credit scores to capture higher surplus on average. Total surplus inclusive of firm profits rises among prime consumers, whereas gains in subprime consumer surplus are greatest among borrowers who were recently prime. The second chapter (co-authored with Alexander Bartik) also studies the regulation of credit market information, focusing on the use of such information in labor markets. In particular we study recent bans on employers' use of credit reports to screen job applicants. This practice has been popular among employers but controversial for its perceived disparate impact on racial minorities. Exploiting geographic, temporal, and job-level variation in which workers are covered by these bans, we analyze these bans' effects in two datasets: the panel dimension of the Current Population Survey (CPS); and data aggregated from state unemployment insurance records. We find that the bans reduced job-finding rates for blacks by 7 to 16 percent, and increased subsequent separation rates for black new hires by 3 percentage points. Results for Hispanics and whites are less conclusive. We interpret these findings in a statistical discrimination model in which credit report data, more for blacks than for other groups, send a high-precision signal relative to the precision of employers' priors. The third chapter (co-authored with Sydnee Caldwell and Daniel Waldinger) returns to consumer credit markets and studies determinants of household borrowing behavior. Many economic models predict that consumption and borrowing decisions today depend on beliefs about risky future income. We quantify one contributor to income uncertainty and study its effects: uncertainty about annual tax refunds. In a low-income sample for whom tax refunds can be a substantial portion of income, we collect novel survey evidence on tax filers' expectations of and uncertainty about their tax refunds; we then link these data with administrative tax data, a panel of credit reports, and survey-based consumption measures. We find that while many households have correct mean expectations about their refunds, there is substantial, and accurately reported, subjective uncertainty. Households borrow moderate amounts out of expected tax refunds: for each dollar of expected refund, roughly 15 cents in revolving debt is repaid after refund receipt. This borrowing and repayment is less pronounced for more uncertain households, consistent with precautionary behavior. The unexpected component of tax refunds is not used to pay down debt, but rather induces higher debt levels. Credit report and survey evidence both suggest that these higher debt levels are driven by newly financed durable purchases such as vehicles.
Author: Bruno Ferman
Publisher:
ISBN:
Category :
Languages : en
Pages : 126
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Book Description
This dissertation consists of three essays. The first chapter studies whether credit demand is sensitive to interest rates, to the prominence of interest rate disclosure, and to nudges. Consumer credit regulations usually require that lenders disclose interest rates. However, lenders can evade the spirit of these regulations by concealing rates in the fine print and highlighting low monthly payments. I explore the importance of such evasion in Brazil, where consumer credit for lower and middle income borrowers is expanding rapidly, despite particularly high interest rates. By randomizing contract interest rates and the degree of interest rate disclosure, I show that most borrowers are highly rate-sensitive, whether or not interest rates are prominently disclosed in marketing materials. An exception is high-risk borrowers, for whom rate disclosure matters. These clients are rate-sensitive only when disclosure is prominent. I also show that borrowers who choose this type of financing are responsive to nudges that favor longer-term plans. Despite this evidence, the financial consequences of information disclosure, even for high-risk borrowers, are relatively modest, and clients are less susceptible to nudges when the stakes are higher. Together, these results suggest that consumers in Brazil are surprisingly adept at decoding information even when lenders try to obfuscate the interest rate information, suggesting a fair amount of sophistication in this population. The second chapter (co-authored with Leonardo Bursztyn, Florian Ederer, and Noam Yuchtman) studies the importance of peer effects in financial decisions. Using a field experiment conducted with a financial brokerage, we attempt to disentangle channels through which a person's financial decisions affect his peers'. When someone purchases an asset, his peers may also want to purchase it because they learn from his choice ("social learning") and because his possession of the asset directly affects others' utility of owning the same asset ("social utility"). We randomize whether one member of a peer pair who chose to purchase an asset has that choice implemented, thus randomizing possession of the asset. Then, we randomize whether the second member of the pair: 1) receives no information about his peer, or 2) is informed of his peer's desire to purchase the asset and the result of the randomization determining possession. We thus estimate the effects of: (a) learning plus possession, and (b) learning alone, relative to a control group. In the control group, 42% of individuals purchased the asset, increasing to 71% in the "social learning only" group, and to 93% in the "social learning and social utility" group. These results suggest that herding behavior in financial markets may result from social learning, and also from a desire to own the same assets as one's peers. The third chapter (co-authored with Pedro Daniel Tavares) uses data on checking and savings accounts for a sample of clients from a large bank in Brazil to calculate the prevalence and cost of "borrowing high and lending low" behavior in a setting where the spread between the borrowing and saving rates is on the order of 150% per year. We find that most clients maintain an overdrawn account at least one day a year while having liquid assets. However, the yearly amount of avoidable financial charges would only correspond, on average, to less than 0.5% of clients' yearly earnings. We also show that consumers are less likely to engage in such behavior when the costs of doing so are higher. These results suggest that the spread between the borrowing and saving rates is a key determinant of this behavior.
Author: Madelaine Reid L'Esperance
Publisher:
ISBN:
Category :
Languages : en
Pages : 144
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Book Description
Many US adults have difficulty managing their financial lives. Financial capability, the knowledge, skills, and access to resources to handle finances effectively, is essential to promoting financial well-being. However, the pathways to improve financial capability remain unclear. Traditional approaches, including financial education, counseling and coaching as well as safety net programs and safe, affordable financial services, are well explored by researchers. However, there are also non-traditional channels which have received less attention. In this dissertation, these approaches are examined, specifically learning by doing, learning from others, and behavioral interventions. First, the influence of repeated experiences in the financial market on financial capability is explored. Using a panel of US couples, the study reveals that relative income is a key determinant of financial responsibility in couples, and partners who defer responsibility are less likely to know their credit score. The second essay examines the effect of youth employment, an experience that may build financial capability, on financial well-being in young adulthood using several approaches to deal with selection into youth employment. Working in high school may provide youth with an opportunity to learn how to effectively manage their finances through experiences and information sharing. The analysis reveals that those who work as youth are not more financial capable in young adulthood than their counterparts who were not employed. Finally, the third essay investigates the role of reminders for encouraging consumers to attend to information about their finances. This study uses a field experiment to test whether reminding credit union members that they have access to a free credit monitoring service motivates them to check their credit score and report. Despite the promise of this low-cost approach to improving accuracy of beliefs about creditworthiness, those who receive the message are no more likely to check their credit than a control group who receives no message. Overall, these essays contribute new evidence on the potential role of non-traditional pathways to financial capability that inform the design of programs and financial services that aim to better inform consumers and improve financial well-being. A roadmap for future research is offered.
Author: Jacelly Carolina Cespedes Telleria
Publisher:
ISBN:
Category :
Languages : en
Pages : 262
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This dissertation empirically analyzes the credit contract decisions made by borrowers. In particular, I exploit a new source of quasi-experimental variation in interest rates to study borrowers’ choices of loan amounts within a credit contract and whether borrowers’ sub-optimal decisions can be used for screening. In the setting, the interest rate schedule features discrete jumps at specific loan amount thresholds, which create strong incentives for bunching below the cutoffs. First, using bunching methods, I find substantial heterogeneity in sensitivities to interest rate changes across broad credit-rating groups. Subsequently, I examine different hypotheses for the lack of responsiveness. I find that sophistication accounts for most of the heterogeneity, while liquidity constraints, adjustment costs, and information availability play marginal roles. Finally, exploiting the introduction of the interest rate notches, I find that unresponsive borrowers are 18% more likely to default, are 24% less likely to receive funding from institutional lenders, and their loans take 20% more time to get funded. The findings suggest that borrowers’ sub-optimal credit decisions can be used to reduce information asymmetries in credit markets.
Author: Natalie Cox Cox
Publisher:
ISBN:
Category :
Languages : en
Pages : 116
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Book Description
The use of technology by firms is changing the way insurance and lending markets function. I study the financial technology, or "fin-tech'', industry, which is characterized by a growing number of online lenders who use data on educational, employment, and financial outcomes to quickly assess the risk of prospective borrowers and offer individualized loan terms. In many ways, their financial "innovations'' can be thought of as movements towards more personalized products: interest rates that better reflect individuals' risk, payment plans that are tailored to individuals' monthly income and expenditures, and user-friendly interfaces that make financial decisions more intuitive and uncomplicated. On an individual level, as firms expand and customize product offerings, there is the potential for large efficiency gains. These innovations could also have wider implications for market structure; for example, if more accurate risk-based pricing creates clear winners and losers, it will change the distribution of consumer surplus. Advances in data-driven underwriting have both efficiency and equity implications for consumer lending markets where private and public credit options coexist. In the $1 trillion student loan market, private lenders now offer a growing distribution of risk-based interest rates, while the federally-run loan program sets a break-even, uniform interest rate. In my first chapter, I measure the overall gains in consumer surplus from such risk-based pricing and quantify the redistributional consequences of low-risk types refinancing out of the government pool into the private market. The empirical analysis is based on a unique applicant-level dataset from an online refinancing firm that contains information on loan terms, household balance sheets, and risk-based interest rates. I first leverage a series of firm-conducted interest rate experiments to estimate the sensitivity of borrowers' maturity and refinancing choices to interest rates. Using the maturity response, I then estimate a structural model of borrowers' repayment preferences. Using the estimated model, I show that comprehensive risk-based pricing generates large absolute gains in welfare of $480 per borrower relative to a break-even uniform price, and $400 relative to a coarser method of FICO-based pricing. If the federal pool conducts breakeven pricing, these efficiency gains come at a direct equity cost -- low risk surplus will increase on average by $2,300, while high risk surplus will fall by $2,100. In order to maintain access to the current uniform rate, the government would have to transition from break-even pricing to an average net subsidy of $2,080 per borrower. In the second chapter, I empirically analyze the fixed and variable rate decisions of borrowers who are financing large personal loans, and are given the option to switch rate types at any point. Many online lending firms now offer financial products that are more flexible and personalized than traditional loans; however, little is known about how consumers will interact with these more complete, but also more complex, contracts. Over my sample time period, the market index interest rate for the fixed and variable rate loans changed considerably. I first present reduced form evidence on the determinants of borrowers' initial rate decisions and the presence of switching costs, and then estimate a structural model that maps these findings to the coefficient of absolute risk aversion and a switching cost parameter. I compare the active and inactive rate choices of borrowers in different interest rate environments to separately identify switching costs from risk preferences.I show that while initial rate choices are very responsive to the prevailing interest rate environment, very few borrowers ever take advantage of the option to switch rate types even when interest rates increase. Specifically, I estimate a risk aversion parameter of .0564, which implies that borrowers are very risk averse, and lower and upper bounds on switching costs from $166 to $1,185. I also show that both the initial probability of choosing a variable rate loan and the probability of never switching are positively correlated with borrower liquidity constraints, which suggests that these borrowers are more focused on current monthly payments than future interest rate risk.
Author: Haiyue Dong
Publisher:
ISBN: 9789180398008
Category : Banks and banking
Languages : en
Pages : 0
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Book Description
This doctoral dissertation consists of three self-contained essays covering different aspects of household finance.?The first paper, Bank Competition and Household Non-Housing Debt: Evidence from U.S. Bank Deregulation, examines the effect of bank deregulation in the U.S. on household non-housing debt. Using household level data from 1984 to 2000, I find that deregulation increases non-housing debt as well as the ratio of non-housing debt to income, with the effects mainly driven by households in the upper half of the income distribution and by auto loans. I show that deregulation has no impact on the leverage of households in the lower half of the income distribution; the increase in debt among these households is proportional to their increase in income following deregulation.?The second paper, Inequality and Household Mortgage Demand: Evidence from HMDA Application Data, uses aggregated mortgage applications at the county level compiled from Home Mortgage Disclosure Act (HMDA) data to examine the relationship between the change in household mortgage demand and the change in inequality between 1998 and 2017 in the United States. This paper's main finding is that mortgage demand is, in general, negatively associated with inequality. However, in areas with lower segregation, the association is smaller in scale; in fact, the sign is even overturned in certain specifications, indicating that exposure to rich households is important for inequality to induce mortgage demand.?The third paper, Retail Investor Attention and SPAC Characteristics and Returns, examines the link between retail attention and SPAC characteristics and returns using data from various sources, including posts on the online forum Reddit. The paper finds that retail investors pay more attention to SPACs with larger market capitalization, more monetary investment from sponsors, and industries that are the subject of intense discussion in the stock market. Through an event study of SPAC merger announcements, the paper finds that SPACs that attract more retail attention ahead of the merger announcement see a sharp decrease in abnormal returns after the announcement. In contrast, in the absence of such prior retail attention, such pattern in abnormal returns is not observed. In addition, retail sentiment can account for a substantial proportion of the cross-sectional cumulative abnormal returns.
Author: Carlos Rafael Parra Castellanos
Publisher:
ISBN:
Category :
Languages : en
Pages :
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This dissertation consists of two papers. The papers examine the U.S. credit markets, first through an examination of the consumer bankruptcy system, and second through the study of the impact of deposit shocks on credit supply. The common thread throughout this dissertation is a focus on the causes and consequences of financial intermediation in the U.S. This dissertation is characterized by the use of new datasets and cross-sectional identification techniques. In the first paper, I study the effect of debt relief provided by the personal bankruptcy system on debtor's ex-post economic behavior. This paper exploits, through a regression discontinuity design, the income thresholds that prevent some households from filing for Chapter 7 protection introduced by the 2005 Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA). I find that Chapter 7 bankruptcy protection increases the probability that the filer creates a new business by 10.30 percentage points, become a first time homeowner by 14.9 percentage points and obtain secured lending by 10.2 percentage points. In addition, Chapter 7 reduces the probability of home foreclosure by 49.7 percentage points and default on tax and non-tax obligations by 39.1 percentage points, relative to filers that did not have access to Chapter 7. In addition, I find that the improvement of debtor's balance sheet following Chapter 7 is responsible for most of the findings. These results provide direct evidence that BAPCPA generated negative consequences on those debtors for whom access to Chapter 7 was restricted. The second paper explores the impact of deposit shocks on bank's balance sheet. The empirical strategy exploits as a natural experiment the lottery jackpot winners of Powerball and Mega Millions. Using hand-collected data, I find that the banks that receive the jackpot winner shock experience a large increase in deposits and total lending. The estimate of the elasticity of small business lending with respect to deposits is 0.876. Consistent with frictions that originate from adverse selection, the set of small and medium-sized banks and those with the most illiquid balance sheets significantly increase loan origination after the winners' shocks.
Author: Yoosef Ghahreman
Publisher:
ISBN:
Category : Electronic dissertations
Languages : en
Pages : 140
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My dissertation is focused on the relationship between financial and business decisions of households. The first essay examines how founders of new businesses changed their portfolios in the aftermath of the 2007-2008 financial crisis. Using the Survey of Consumer Finances 2007-2009 panel data, I find evidence that those who became entrepreneurs (entrants) reduced financial portfolio risk compared to those who remained paid employees. I identify a movement away from stockholdings as a result of entry, and provide support for a response to the background risk arising from privately held businesses. Business ownership was also associated with changes in the real estate holdings of entrants. These findings highlight the link between private and public equity markets through entrepreneurs' portfolio choices and introduce a connection between housing and entrepreneurship through changes in home ownership. The second essay studies the trends in angel investment in a representative sample of the U.S. economy and explores the characteristics of these individual private investors. Our results suggest that angel investment is highly concentrated among the wealthiest households, and wealth plays an important role in participation, even among the top 1% of wealth distribution. These wealthy households, who own the majority of the economy's angel equity, increased their participation in the angel investing market during the 1998-2010 period, unaffected by the recessions and financial crisis. In the representative sample, self-employment plays an important role in predicting the incidence of being an angel investor and angel equity share, but the relationship is not as robust for the subsample of the top 1%. Self-reported willingness to take financial risk is generally associated with a higher likelihood of being an angel investor and a larger share of angel equity in different specifications, especially for the 1%. The angels are likely to be more financially disciplined as measured by their credit card balances and how much effort they put into choosing their investments. Angels' affluence, their higher financial discipline and more risk tolerance, together with the relatively low shares of angel equity in the portfolios of most angel investors might suggest calculated risk taking on the part of an average angel investor.
