Uncertainty and switching in the mortgage market

Celine Gondat-Larralde () and Frank Strobel

Applied Economics, 2013, vol. 45, issue 21, 3068-3073

Abstract: We examine when it might be optimal for borrowers to switch providers of debt products such as their mortgage, allowing in particular for the role of uncertainty by constructing a stylized real options model of the decision problem involved. We illustrate with numerical examples, and then calibrate the model for the UK mortgage market for the period October 1998 to March 2005; significant magnitudes of trigger levels can arise even when standard switching costs are zero, providing an additional, risk-related explanation to the inertia commonly observed in borrowers' product choices.

Date: 2013
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DOI: 10.1080/13504851.2012.690842

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