Product differentiation and populistic entry strategies in a mortgage market with Bertrand competition

2021 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Trond Arne Borgersen
Keyword(s):  
Interest Rate ◽  
Product Differentiation ◽  
Mortgage Market ◽  
Bertrand Competition ◽  
Content Type ◽  
Mortgage Rate ◽  
Funding Cost ◽  
Mortgage Rates ◽  
Entry Strategy ◽  
Strategic Market

PurposeThe purpose of this paper is to analyse the interaction between a profit maximising mortgagor and a newcomer to a mortgage market with Bertrand competition where the newcomer has a populistic entry strategy and undercuts mortgage market rates. The intention of the paper is to relate the populistic entry strategy to mortgage market characteristics and the strategic market position of both the established mortgagor and the newcomer in question.Design/methodology/approachThe paper analyses a mortgage market by combining the behaviour of a profit maximising mortgagor with that of a newcomer to the mortgage market which has a populistic entry strategy and does not maximise profits. The short-run market solution provides comparative statics on the strategic market position of both the established mortgagor and the newcomer to the mortgage market during the entry phase both related to product differentiation and to price mirroring and undercutting of mortgage rates.FindingsThe model finds a mortgage market solution where a lower mortgage rate helps the newcomer gain a customer base. As the newcomer's strategy to mirror prices makes it unable to pass-through funding cost to its mortgage rate, the strategy is unsustainable over time. The established mortgagor has a strategically beneficial position as the mortgage market rates only relate to its funding cost. Unless the newcomer has a funding cost advantage, the established mortgagor has a higher interest rate margin. Differentiation impacts the newcomers’ interest rate margin positively. If the newcomer lacks a funding cost advantage, there is a critical mirroring rate that ensures it a higher interest rate margin. The higher the newcomers’ own funding cost, the higher is the upper bound for price mirroring, relating market entry to a small undercutting of mortgage rates and a mortgage market with weak competition. The funding cost of the established mortgagor pulls pricing in the opposite direction, allowing for a lower mirroring rate and tougher mortgage market competition during entry.Originality/valueThe paper aims to contribute to the understanding of market equilibrium in the absence of profit maximising behaviour. Framing a mortgage market in terms of a duopoly where a newcomer enters with a populistic entry strategy offering a lower mortgage rate and a mortgage product with a different loan-to-value (LTV) ratio, a novel mortgage market case comes about. The populistic entry strategy produces an augmented reaction curve, crucial for the mortgage market rates.

The supply side of product differentiation in the Italian mortage market

2020 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Silvia Del Prete ◽  
Cristina Demma ◽  
Paola Rossi
Keyword(s):  
Product Differentiation ◽  
Price Competition ◽  
Market Competition ◽  
Ordinary Least Squares ◽  
Mortgage Market ◽  
Empirical Literature ◽  
Local Market ◽  
Supply Side ◽  
Local Markets ◽  
Content Type

Purpose This paper aims to propose a new indicator of product differentiation in the mortgage market and use it to examine how the double crisis, local market competition and bank-specific characteristics have influenced the supply of non-conventional mortgages in Italy. Design/methodology/approach This paper uses a special Bank of Italy’s survey on 400 Italian banks over the period 2006–2013, to compute a new indicator for product differentiation in the mortgage market. This paper considers mortgage with non-conventional characteristics: loan-to-value ratio greater than 80%; duration longer than 30 years or with a flexible maturity. This paper estimates probit and ordinary least squares (OLS) models using panel data at bank-time level. Findings The findings suggest that during the double crisis that hit the Italian economy between 2008 and 2013, the diversification process in the Italian household mortgage market slowed down. Controlling for banks’ and local markets’ this study finds that larger, less risky banks and those that have adopted scoring systems are more likely to offer non-conventional mortgages; moreover, banks operating in more competitive markets and in markets where other banks offer non-conventional loans tend to diversify their supply more. Most of these indications are confirmed by analyzing the quantities actually granted. These results suggest that the structure of the local markets does matter, and that there could be a non-price competition effect among banks in providing differentiated mortgage contracts. Originality/value The indicator, computed using data at bank level drawn from a special Bank of Italy’s survey, goes beyond the standard approach on product differentiation followed in the empirical literature, mainly base on the dichotomy between fixed and variable lending rates. Furthermore, to best of the authors’ knowledge, so far there is no empirical evidence on the supply-side factors that influenced the diversification of mortgages’ contractual terms during the crisis; particularly, there is no evidence on the role of local market competition and bank-specific features. This paper contributes to fill this gap in the literature.

The optimal LTV-ratio, mortgage market variability and monetary policy regimes

2017 ◽  
Vol 9 (02) ◽  
pp. 225-239 ◽  
Author(s):  
Trond Arne Borgersen
Keyword(s):  
Monetary Policy ◽  
Financial Stability ◽  
Mortgage Market ◽  
Risk Exposure ◽  
Demand Side ◽  
Home Equity ◽  
Content Type ◽  
Policy Regimes ◽  
Housing Investment ◽  
Mortgage Rate

Purpose The purpose of this paper is twofold: first, it derives the optimal loan-to-value (LTV)-ratio for a mortgagor that maximizes the return to home equity when considering the capital structure of housing investment. Second, it analyses the demand-side contribution to mortgage market variability across monetary policy regimes. Design/methodology/approach The paper endogenizes both the relation between the LTV ratio and the mortgage rate and the relation between LTV and the rate of appreciation. When we consider LTV-variance and the demand-side contribution to mortgage market variability, three stylized regimes is considered. Findings The paper finds an intuitive ranking of the optimal LTV-ratios across regimes, and the optimal LTV-ratio peaks during a housing boom. When, however, monetary policy ignores asset inflation the demand-side contribution to market variability is highest during normal market conditions. Hence, there is a potentially hump-shaped relation between the risk exposure of individual mortgagors and the demand-side contribution to mortgage market variability. Originality/value The paper finds a potentially hump-shaped relation between the risk exposure of individual mortgagors and the demand-side contribution to mortgage market variability, which, to the best of our knowledge, is novel. The paper shows how macro-prudential and monetary policy are complementary tolls for preserving financial stability.

scholarly journals The strategic response of banks to macroprudential policies: Evidence from mortgage stress tests in Canada

2021 ◽  
Author(s):  
Robert Clark ◽  
Shaoteng Li
Keyword(s):  
Interest Rate ◽  
Credit Markets ◽  
Mortgage Market ◽  
Financial Intermediaries ◽  
Stress Tests ◽  
Difference In Differences ◽  
Strategic Response ◽  
Macroprudential Policies ◽  
The Interest Rate

Abstract Following the crisis, macroprudential regulations targeting mortgage-market vulnerabilities were widely adopted, their success often relying on the response of financial intermediaries. We provide evidence from Canada suggesting banks may have behaved strategically to limit the effectiveness of recently implemented mortgage stress tests. Before implementation, borrowers had to prove they could make mortgage payments based on the interest rate specified in the contract. The new tests require borrowers to show they can afford payments based on a typically higher qualifying rate, derived from the mode of 5-year rates posted by the six largest banks. The government’s objective was to cool credit markets, but, since many mortgages are government-insured, the big banks’ interests were not aligned. We find evidence of rate manipulation using a difference-in-differences approach comparing changes in spreads for 5-year mortgages with 3-year spreads, unaffected by the policy. The qualifying rates were lowered encouraging continued borrowing, muting the tests’ impact.

Volatility integration of gold and crude oil prices with the interest rates in India

2021 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Shailesh Rastogi ◽  
Adesh Doifode ◽  
Jagjeevan Kanoujiya ◽  
Satyendra Pratap Singh
Keyword(s):  
Interest Rate ◽  
Crude Oil ◽  
Interest Rates ◽  
Global Economy ◽  
Spillover Effect ◽  
Price Volatility ◽  
Volatility Spillover ◽  
Content Type ◽  
Crude Oil Prices ◽  
The Impact

PurposeCrude oil, gold and interest rates are some of the key indicators of the health of domestic as well as global economy. The purpose of the study is to find the shock volatility and price volatility effects of gold and crude oil market on interest rates in India.Design/methodology/approachThis study finds the mutual and directional association of the volatility of gold, crude oil and interest rates in India. The bi-variate GARCH models (Diagonal VEC GARCH and BEKK GARCH) are applied on the sample data of gold price, crude oil price and yield (interest rate) gathered from November 30, 2015 to November 16, 2020 (weekly basis) to investigate the volatility association including the volatility spillover effect in the three markets.FindingsThe main findings of the study focus on having a long-term conditional correlation between gold and interest rates, but there is no evidence of volatility spillover from gold and crude oil on the interest rates. The findings of the study are of great importance especially to the policymakers, as they state that the fluctuations in prices of gold and crude oil do not adversely impact the interest rates in India. Therefore, the fluctuations in prices of gold and crude may generally impact the economy, but it has nothing to do with interest rate in particular. This implies that domestic and foreign investments in the country will not be affected by gold and crude oil that are largely driven by interest rates in the country.Practical implicationsGold and crude oil are two very important commodities that have their importance not only for domestic affairs but also for international business. They veritably influence the economy including forex exchange for any nation. In addition to this, the researchers believe the findings will provide insights to policymakers, stakeholders and investors.Originality/valueGold and crude oil undoubtedly influence the exchange rates but their impact on the interest rates in an economy is not definite and remains ambiguous owing to the mixed findings of the studies. The lack of studies related to the impact of gold and crude oil on the interest rates, despite them being essentials for the health of any economy is the main motivation of this study. This study is novel as it investigates the volatility impact of crude oil and gold on interest rates and contributes to the existing literature with its findings.

Crawford Development Co. and Southeast Bank of Texas

2007 ◽  
pp. 1-10
Author(s):  
Anton Ovchinnikov ◽  
Elena Loutskina ◽  
Casey Lichtendahl ◽  
Jayson Lipsey ◽  
Brian Burke
Keyword(s):  
Interest Rate ◽  
Real Estate ◽  
Financial Crises ◽  
Mortgage Market ◽  
Commercial Development ◽  
Residential Market ◽  
The Interest Rate ◽  
To Receive ◽  
Real Estate Financing

In the early months of the 2007-08 financial crises, a loan manager faces a real estate financing decision. Should he approve a bullet structure three-year loan to a longstanding client, a legendary Texan developer? The developer, who near retirement downsized his business, is seeking financing for his only project: residential or commercial development on an attractive piece of land in suburban Houston. The loan manager considers the decision in light of the mortgage market turmoil, seeing commercial projects as safer, but also factoring that the residential market could bring higher returns if the market stabilizes soon. The manager collects the data and asks an analyst to assess the risks; that ultimately requires assessing the economics of both projects from both the bank’s and the developer’s perspectives. The bank could still change the interest rate on the loan to receive adequate compensation for the risk it carries, but the loan manager knows that doing so will change their long-term client willingness to take on the loan.

Natural disasters and monetary policy: evidence from an augmented Taylor rule

2021 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Nicholas Apergis ◽  
James E. Payne
Keyword(s):  
Developing Countries ◽  
Monetary Policy ◽  
Interest Rate ◽  
Natural Disasters ◽  
Natural Disaster ◽  
Taylor Rule ◽  
Nominal Interest Rate ◽  
Policy Response ◽  
Content Type ◽  
Short Run

Purpose The purpose of this paper is to examine the short-run monetary policy response to five different types of natural disasters (geophysical, meteorological, hydrological, climatological and biological) with respect to developed and developing countries, respectively. Design/methodology/approach An augmented Taylor rule monetary policy model is estimated using systems generalized method of moments panel estimation over the period 2000–2018 for a panel of 40 developed and 77 developing countries, respectively. Findings In the case of developed countries, the greatest nominal interest rate response originates from geophysical, meteorological, hydrological and climatological disasters, whereas for developing countries the nominal interest rate response is the greatest for geophysical and meteorological disasters. For both developed and developing countries, the results suggest the monetary authorities will pursue expansionary monetary policies in the short-run to lower nominal interest rates; however, the magnitude of the monetary response varies across the type of natural disaster. Originality/value First, unlike previous studies, which focused on a specific type of natural disaster, this study examines whether the short-run monetary policy response differs across the type of natural disaster. Second, in relation to previous studies, the analysis encompasses a much larger panel data set to include 117 countries differentiated between developed and developing countries.

scholarly journals The impact of Musharakah financing on the monetary policy in the Islamic economy

2018 ◽  
Vol 3 (3/4) ◽  
pp. 139-152
Author(s):  
Hatem Adela
Keyword(s):  
Economic Theory ◽  
Monetary Policy ◽  
Interest Rate ◽  
Economic Activity ◽  
Methodological Framework ◽  
Mathematical Methods ◽  
Content Type ◽  
Return Rates ◽  
The Interest Rate ◽  
The Impact

Purpose This paper aims to contribute to formulating the methodological framework for a paradigm of Islamic economics, using the development of the conventional economics, theoretical and mathematical methods. Design/methodology/approach The study based on the inductive and mathematical methods to contribute to economic theory within the methodological framework for Islamic Economics, by using the return rate of Musharakah rather than the interest rate in influence the economic activity and monetary policy. Findings Via replacement, the concept of the interest rate by the return rates of Musharakah. It concludes that the central bank can control the monetary policy, economic activity and the efficient allocation of resources by using the return rates of Musharakah through the framework of Islamic economy. Practical/implications The study is a contribution to formulate the methodological framework for a paradigm of Islamic economics, where it investigates the impact of return rates of Musharakah on the money market and monetary policy, by the mathematical methods used in the conventional economy. Also, the study illustrates the importance of further studies that examine the methodological framework for Islamic Economics. Originality/value The study aims to contribute to formulating the Islamic economic theory, through the return rate of Musharakah financing instead of the interest rate, and its effectiveness of the monetary policy. As well as reformulating the concepts of the investment function, the present value and the marginal efficiency rate of investment according to the Islamic economy approach.

Foreign subsidiaries’ competitive strategy: the impact of corporate support and local competition

2017 ◽  
Vol 29 (6) ◽  
pp. 606-627 ◽  
Author(s):  
Anders Pehrsson
Keyword(s):  
Product Differentiation ◽  
Competitive Strategy ◽  
Positive Association ◽  
International Strategy ◽  
Competitive Intensity ◽  
Content Type ◽  
Cost Leadership ◽  
The Usa ◽  
Corporate Support ◽  
The Impact

Purpose The study draws on the resource-based view and the contingency view of strategy. The purpose of this paper is to contribute to international strategy literature by extending the current understanding of foreign subsidiary’s competitive strategy in terms of cost leadership and product differentiation. Design/methodology/approach Hypotheses concern associations between corporate support building on product and skills relatedness and subsidiary strategies. Also, it is hypothesized that strategies are due to the type of local competitive intensity. The hypotheses were tested on wholly owned subsidiaries of Swedish industrial firms in Germany, the UK and the USA. Findings Product and skills relatedness between the subsidiary and the corporate core unit are positively associated with the subsidiary’s emphasis on cost leadership. Also, a positive association was found between skills relatedness and product differentiation, and extensive competitive intensity strengthens the relationship. Research limitations/implications The study specifies what business relatedness is needed for a subsidiary’s competitive strategy; skills relatedness is more important than product relatedness; the type of local competitive intensity is important; corporate support and local strategy operate simultaneously. Practical implications Management is advised to implement a foreign subsidiary’s competitive strategy by recognizing the mechanisms identified in this study. Originality/value In a unique way, the study captures the role of corporate support of a foreign subsidiary’s competitive strategy relying on business relatedness and the importance of aligning the strategy with competitive intensity.

scholarly journals Macroeconomic determinants of interest rate spreads in Ghana

2017 ◽  
Vol 8 (1) ◽  
pp. 76-88 ◽  
Author(s):  
Samuel Kwabena Obeng ◽  
Daniel Sakyi
Keyword(s):  
Interest Rate ◽  
Exchange Rate Volatility ◽  
Institutional Quality ◽  
Fiscal Discipline ◽  
Content Type ◽  
Distributed Lag ◽  
Short Run ◽  
Interest Rate Spreads ◽  
Macroeconomic Determinants ◽  
The Impact

Purpose The purpose of this paper is to examine macroeconomic determinants of interest rate spreads in Ghana for the period 1980-2013. Design/methodology/approach The autoregressive distributed lag bounds test approach to cointegration and the error correction model were used for the estimation. Findings The results indicate that exchange rate volatility, fiscal deficit, economic growth, and public sector borrowing from commercial banks, increase interest rate spreads in Ghana in both the long and short run. Institutional quality reduces interest rate spreads in the long run while lending interest rate volatility and monetary policy rate reduce interest rate spreads in the short run. Research limitations/implications The depreciation of the Ghana cedi must be controlled since its volatility increases spreads. There is a need for fiscal discipline since fiscal deficits increase interest rate spreads. Government must reduce its domestic borrowing because the associated crowding-out effect increases interest rate spreads. The central bank must improve its monitoring and regulation of the financial sector in order to reduce spreads. Originality/value The main novelty of the paper (compared to other studies on Ghana) lies on the one hand; analysing macroeconomic determinants of interest rate spreads and, on the other hand, controlling for the impact of institutional quality on interest rate spreads in Ghana.

Modeling debt choice in agriculture: the effect of endogenous asset values

2017 ◽  
Vol 77 (1) ◽  
pp. 95-110 ◽  
Author(s):  
Maria Bampasidou ◽  
Ashok K. Mishra ◽  
Charles B. Moss
Keyword(s):  
Panel Data ◽  
Interest Rate ◽  
Agricultural Sector ◽  
Macroeconomic Policy ◽  
Rate Of Return ◽  
Data Set ◽  
Content Type ◽  
Asset Values ◽  
The Usa ◽  
Non Parametric

Purpose The purpose of this paper is to investigate the endogeneity of asset values and how it relates to farm financial stress in US agriculture. The authors conceptualize an implied measure of farm financial stress as a function of debt position. The authors posit that there are variations in the asset values that are beyond the farmer’s control and therefore have implications on farm debt. Design/methodology/approach The framework recognizes the endogeneity of return on assets (ROA). It uses a non-parametric technique to approximate the variance of expected ROA (VEROA). The authors model the rate of return on agricultural assets and interest rate with a formulation that focuses on macroeconomic policy. Further, the authors use a dynamic balanced panel data set from 1960 to 2011 for 15 US agricultural states from the Agricultural Resource Management Survey, and information from traditional state-level financial statements. Findings Estimation of linear dynamic debt panel data models accounting for the endogeneity of ROA and VEROA is a challenging task. Estimated variances are unstable. Hence, the authors focus on variance specification that uses the residuals squared from the ARIMA specification and non-parametric estimators. Arellano-Bover/Blundell-Bond generalized method of moments estimation procedures, although may be biased, show that VEROA has a negative and significant effect on the total amount of debt in the agricultural sector. Research limitations/implications The instruments used in this analysis are lagged regressors which may be weakly correlated with the relevant first-order condition, hence not properly identifying the parameters of interest. Future research could include the identification of better instruments, potentially use of sequential moment conditions. Originality/value Unlike previous study, the authors use non-parametric approximation of VEROA. The authors model the rate of return on agricultural assets and interest rate with a formulation that focuses on macroeconomic policy. Second, the authors make use of a large dynamic balanced panel data set from 1960 to 2011 for 15 agricultural states in the USA. To the best of the authors’ knowledge, this study is one of the few that provides evidence on risk-balancing behavior at the agricultural sector level, of the USA.

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