Choice of contract maturity with applications to international and mortgage lending.

摘要

This dissertation contributes to the literature of contract length by identifying benefits and costs of long-term commitment in the case of both foreign debt contracts, and mortgage loan contracts in particular from the borrower point of view. More precisely, I characterize and compare two alternatives structures of debt contracts which differ only by the extent to which they accommodate for an exogenous shock on the future interest-rate. On one hand, long-term contracts do not adjust to the realized interest-rate, so that they are risk-free for the borrower. Short-term contracts on the other hand, adjust the repayments to the realized rate of interest. Therefore, they are risky for the borrower. Intuitively, the choice of long-term commitment is similar to the choice between a risky asset and a risk-free asset. The key factors that govern this choice are both the degree of risk aversion, and the income profile of the borrower.Key words: Fixed-rate mortgage, Adjustable-rate mortgage, Asian crisis, Maturity mismatch, Precautionary saving, Flexibility, Self-insurance, Contract length.In the first chapter, my model of maturity choice helps explain why risk-averse borrowers choose adjustable-rate mortgage contracts. My contribution, specifically to the literature on mortgage choice, is to prove that adjustable-rate mortgage bans allow for self-insurance against the interest-rate risk, by adjusting repayments consequently. Under some conditions, it becomes optimal to renounce to the insurance attached to fixed-rate mortgage bans. In the second chapter, I run an estimation of a reduce-form equation, based on Chapter 1's findings. Then, I compare the estimates with the corresponding empirical literature. The novelty in this chapter comes from using a new database on mortgage indebtedness. In the third chapter, my model of maturity choice helps explain the surge in short-term foreign borrowing by Emerging countries prior to the Asian crisis. My contribution, specifically to the literature on international capital flows, is to prove that long-term and short-term debt instruments are imperfect substitutes. Hence, any policy aiming at discouraging short-term indebtedness should propose alternatives instruments.