A Contingent Claims Analysis of Price Level‐Adjusted Mortgages

Taewon Kim

Real Estate Economics, 1987, vol. 15, issue 3, 117-131

Abstract: This paper examines the performance of alternative mortgage instruments in an environment of stochastic price fluctuations. The two most widely discussed contracts that deal with inflation are the adjustable‐rate mortgage (ARM) and the price level‐adjusted mortgage (PLAM). The former compensates for inflation by paying the nominal interest rate, which contains a component reflecting the rate of inflation. Nonetheless, even without explicit nominal amortization, this results in real amortization and hence a tilting effect. In addition, the inflation component of the nominal interest rate is shown to reflect only anticipated and not actual inflation, and so the real value of an ARM fluctuates due to unanticipated inflation. A PLAM suffers from none of these defects. To the extent that one is interested in a mortgage whose properties reflect the underlying real environment, the price level‐adjusted mortgage is the ideal instrument.

Date: 1987
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

Downloads: (external link)
https://doi.org/10.1111/1540-6229.00423

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:bla:reesec:v:15:y:1987:i:3:p:117-131

Ordering information: This journal article can be ordered from
http://www.blackwell ... bs.asp?ref=1080-8620

Access Statistics for this article

Real Estate Economics is currently edited by Crocker Liu, N. Edward Coulson and Walter Torous

More articles in Real Estate Economics from American Real Estate and Urban Economics Association Contact information at EDIRC.
Bibliographic data for series maintained by Wiley Content Delivery ().