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Adverse Selection and the Market for Building Society Mortgage Finance

Leigh Drake () and Mark Holmes ()

The Manchester School of Economic & Social Studies, 1997, vol. 65, issue 1, 58-70

Abstract: This study investigates the possibility of adverse selection in the U.K. mortgage market. Long- and short-run equations for the supply and demand for building society net advances are estimated using the Johansen procedure and three stage least squares. The authors identify a long-run, backward-bending mortgage supply curve with a bank-optimal nominal mortgage rate of 11.86 percent and, from the cointegrating vectors, they are able to estimate good error correction representations of supply and demand using three stage least squares. The authors find that the adjustment of supply and demand towards their long-run equilibrium values is fairly slow. Copyright 1997 by Blackwell Publishers Ltd and The Victoria University of Manchester

Date: 1997
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