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Join us for the second in the Summer 2021 QCGBF Virtual Seminar Series, with Tarun Ramadorai who will be presenting 'Cross-subsidies in the UK mortgage market'.
Household inaction in mortgage refinancing is pervasive despite significant financial incentives to take action (Andersen et al., 2020). When markets are populated by households with varying degrees of inaction, inactive households implicitly cross-subsidize active households (Gabaix and Laibson, 2006). In the mortgage market, this cross-subsidy allows competitive lenders to set lower rates on average, as a result of the higher average rate paid by inactive households. To provide a money-metric assessment of this cross-subsidy, we build a model of household refinancing behaviour and structurally estimate it in the UK mortgage market, an institutional setting well-suited for this calculation given that households pick initial "teaser rates’’ that automatically roll over into a high variable rate in the absence of prompt refinancing. Our structural estimation utilizes rich administrative data on the stock of loans outstanding, rather than the flow, allowing us to side-step the need for additional assumptions to evaluate the size of the cross-subsidy. The model and data also yield assessments of how the cross-subsidy varies across demographic characteristics and regional locations in the UK.
About the speaker
Tarun Ramadorai is Professor of Financial Economics at Imperial College London. He has a broad range of research interests in the areas of household finance, asset pricing, international finance, and real estate. He is greatly interested in finance and economics issues in emerging markets, with a particular focus on India. He has published on these topics in a number of scholarly journals in finance and economics including the American Economic Review, the Review of Economic Studies, the Journal of Economic Literature, the Journal of Finance, the Journal of Financial Economics, and the Review of Financial Studies.
Tarun currently serves as an Editor of the Review of Financial Studies. He has previously served as an Associate Editor of the Review of Financial Studies and Management Science, and as a council member of the Society of Financial Studies. He is currently a Research Fellow of CEPR, a Senior Academic Fellow of the Asian Bureau of Finance and Economics Research (ABFER), and a Nonresident Senior Fellow at the National Council of Applied Economic Research (NCAER).