
on Risk Management 
Issue of 2015‒06‒13
twentyone papers chosen by 
By:  Delis, Manthos; Hasan, Iftekhar; Tsionas, Efthymios 
Abstract:  Use of variability of profits and other accountingbased ratios in order to estimate a firm's risk of insolvency is a wellestablished concept in management and economics. This paper argues that these measures fail to approximate the true level of risk accurately because managers consider other strategic choices and goals when making risky decisions. Instead, we propose an econometric model that incorporates current and past strategic choices to estimate risk from the profit function. Specifically, we extend the wellestablished multiplicative error model to allow for the endogeneity of the uncertainty component. We demonstrate the power of the model using a large sample of U.S. banks, and show that our estimates predict the accelerated bank risk that led to the subprime crisis in 2007. Our measure of risk also predicts the probability of bank default both in the period of the default, but also well in advance of this default and before conventional measures of bank risk. 
Keywords:  Endogenous bank risk; Strategic management choices 
JEL:  C3 C30 G2 G21 
Date:  2015–06–01 
URL:  http://d.repec.org/n?u=RePEc:pra:mprapa:64907&r=rmg 
By:  Federico Nucera (Luiss Guido Carli University, Rome, Italy); Bernd Schwaab (European Central Bank, Frankfurt, Germany); Siem Jan Koopman (Faculty of Economics and Business Administration, VU University Amsterdam); André Lucas (Faculty of Economics and Business Administration, VU University Amsterdam) 
Abstract:  We propose to pool alternative systemic risk rankings for financial institutions using the method of principal components. The resulting overall ranking is less affected by estimation uncertainty and model risk. We apply our methodology to disentangle the common signal and the idiosyncratic components from a selection of key systemic risk rankings that are recently proposed. We use a sample of 113 listed financial sector firms in the European Union over the period 20022013. The implied ranking from the principal components is less volatile than most individual risk rankings and leads to less turnover among the top ranked institutions. We also find that pricebased rankings and fundamentals based rankings deviated substantially and for a prolonged time in the period leading up to the financial crisis. We test the adequacy of our newly pooled systemic risk ranking by relating it to credit default swap premia. 
Keywords:  systemic risk contribution; risk rankings; forecast combination; financial regulation; banking supervision 
JEL:  G01 G28 
Date:  2015–06–01 
URL:  http://d.repec.org/n?u=RePEc:tin:wpaper:20150070&r=rmg 
By:  He, Zhiguo (University of Chicago); Krishnamurthy, Arvind (Stanford University) 
Abstract:  Systemic risk arises when shocks lead to states where a disruption in financial intermediation adversely affects the economy and feeds back into further disrupting financial intermediation. We present a macroeconomic model with a financial intermediary sector subject to an equity capital constraint. The novel aspect of our analysis is that the model produces a stochastic steady state distribution for the economy, in which only some of the states correspond to systemic risk states. The model allows us to examine the transition from "normal" states to systemic risk states. We calibrate our model and use it to match the systemic risk apparent during the 2007/2008 financial crisis. We also use the model to compute the conditional probabilities of arriving at a systemic risk state, such as 2007/2008. Finally, we show how the model can be used to conduct a macroeconomic "stress test" linking a stress scenario to the probability of systemic risk states. 
JEL:  E44 G12 G20 
Date:  2015–03 
URL:  http://d.repec.org/n?u=RePEc:ecl:stabus:3277&r=rmg 
By:  Alain Chateauneuf (CES  Centre d'économie de la Sorbonne  UP1  Université PanthéonSorbonne  CNRS, EEPPSE  Ecole d'Économie de Paris  Paris School of Economics, IPAG  Business School); Mina Mostoufi (CES  Centre d'économie de la Sorbonne  UP1  Université PanthéonSorbonne  CNRS, EEPPSE  Ecole d'Économie de Paris  Paris School of Economics); David Vyncke (Universiteit Gent  Vakgroep Toegepaste Wiskunde en Informatica) 
Abstract:  Monte Carlo (MC) simulation is a technique that provides approximate solutions to a broad range of mathematical problems. A drawback of the method is its high computational cost, especially in a highdimensional setting. Estimating the Tail ValueatRisk for large portfolios or pricing basket options and Asian options for instance can be quite timeconsuming. For these types of problems, one can construct an upper bound in the convex order by replacing the copula by the comonotonic copula. This comonotonic upper bound can be computed very quickly, but it gives only a rough approximation. In this paper we introduce the Comonotonic Monte Carlo (CoMC) simulation, which uses the best features of both approaches. By using the comonotonic approximation as a control variate we get more accurate estimates and hence the simulation is less timeconsuming. The CoMC is of broad applicability and numerical results show a remarkable speed improvement. We illustrate the method for estimating Tail ValueatRisk and pricing basket options and Asian options. 
Abstract:  La méthode de Monte Carlo est une technique qui permet la résolution d'un grand nombre de problèmes en mathématiques. L'inconvénient de la méthode est la lourdeur des calculs spécialement dans le cadre multidimensionnel. L'estimation de la « Tail ValueatRisk » dans le cas d'un grand portefeuille ou la tarification d'un portefeuille d'actions comme les options asiatiques peuvent être relativement longues. Dans ce genre de cas, on peut définir une borne supérieure d'ordre convexe en remplaçant la copula par une copula comonotone. Dans cet article, nous introduisons la méthode de Monte Carlo comonotone qui combine les avantages des deux approches. En utilisant l'approximation comonotone comme variable aléatoire de contrôle, nous obtenons une estimation plus précise et donc une simulation moins longue. La CoMc a une large application et les résultats obtenus montrent une amélioration remarquable en terme de vitesse de résolution. Nous illustrerons cette méthode par l'estimation de la TVar, la tarification d'un portefeuille d'actions et des options asiatiques. 
Date:  2015–02 
URL:  http://d.repec.org/n?u=RePEc:hal:cesptp:hal01159741&r=rmg 
By:  Brown, Martin; Guin, Benjamin 
Abstract:  We study the exposure of mortgage borrowers in Switzerland to interest rate, income and house price risks and examine how the households’ choice of risky mortgages is related to individual interest rate expectations and riskaversion. Our analysis is based on a unique data set of household mortgage applications from September 2012 until January 2014. Our assessment of risk exposure among mortgage borrowers in Switzerland is highly sensitive to the underlying assumptions on mortgage costs, household income and house value. Our main results suggest that the exposure of mortgage borrowers to interest rate and house price risks is limited in the mediumterm. We further document that the choice of mortgage contract seems to be more influenced by affordability concerns than risk concerns. In particular, individual interest rate expectations hardly affect mortgage contract choice. 
Keywords:  Mortgage Default, Mortgage Choice, Household Finance, Mortgage Risk 
JEL:  G21 D14 R21 R31 
Date:  2014–12 
URL:  http://d.repec.org/n?u=RePEc:usg:sfwpfi:2015:09&r=rmg 
By:  Colliard , JeanEdouard; Perignon , Christophe 
Abstract:  The authors review the extensive literature on systemic risk and connect it to the current regulatory debate. While they take stock of the achievements of this rapidly growing field, they identify a gap between two main approaches. The first one studies different sources of systemic risk in isolation, uses confidential data, and inspires targeted but complex regulatory tools. The second approach uses market data to produce global measures which are not directly connected to any particular theory, but could support a more efficient regulation. Bridging this gap will require encompassing theoretical models and improved data disclosure. 
Keywords:  Banking; Macroprudential Regulation; Systemically Important Financial In stitutions; Financial Crises; TooBigToFail 
JEL:  G01 G32 
Date:  2015–04–13 
URL:  http://d.repec.org/n?u=RePEc:ebg:heccah:1088&r=rmg 
By:  Gambetta Podesta, Renzo 
Abstract:  This Report use a resampling based on Monte Carlo simulation techniques to calculate distribution for the losses observed in the loans portfolios during 2013 and 2014 for each of the Municipal Savings and Credit Loan Banks in Peru. With these results two key variables are analyzed; regulatory capital ratios are compared with the unexpected losses to verify levels of solvency and the income statements are used to achieve a differently measure of the commons accountant financial profitability ratios for better allocation to the adjusted returns of credit risk of each institution. The analysis was conducted with information from RCD (Reporte Crediticio de Deudores), regulatory report submitted for the SBS (Superintendencia de Banca y Seguros) where we can find detailed information for each debtor like debt amount granted by the financial system, delinquency indicators, guarantees, credit provisions, among others. Distributions of losses are computed repeatedly through the nonparametric bootstrap resampling method from the original population to calculate the desired statistics after each iteration. The results show that the simple profitability ratios differ from those calculated in the simulation because they would not take into account the real risks they face to achieve such returns. In terms of solvency the result is mixed, the regulatory capital requirement for credit risk in some Cajas would be underestimated even they would not be covering the legal minimum. 
Keywords:  RARORAC, Credit Risk, Expected Shortfall, Montecarlo Simulation,Expected losses, Unexpected losses,Microfinances 
JEL:  C14 C15 G21 
Date:  2015–03 
URL:  http://d.repec.org/n?u=RePEc:pra:mprapa:64741&r=rmg 
By:  esposito, francesco paolo; cummins, mark 
Abstract:  Extending previous risk model backtesting literature, we construct multiple hypothesis testing (MHT) with the stationary bootstrap. We conduct multiple tests which control for the generalized confidence level and employ the bootstrap MHT to design multiple comparison testing. We consider absolute and relative predictive ability to test a range of competing risk models, focusing on ValueatRisk (VaR) and Expected Shortfall (ExS). In devising the test for the absolute predictive ability, we take the route of recent literature and construct balanced simultaneous confidence sets that control for the generalized familywise error rate, which is the joint probability of rejecting true hypotheses. We implement a stepdown method which increases the power of the MHT in isolating false discoveries. In testing for the ExS model predictive ability, we design a new simple test to draw inference about recursive model forecasting capability. In the second suite of statistical testing, we develop a novel device for measuring the relative predictive ability in the bootstrap MHT framework. The device, we coin multiple comparison mapping, provides a statistically robust instrument designed to answer the question: ''which model is the best model?''. 
Keywords:  valueatrisk, expected shortfall, bootstrap multiple hypothesis testing, generalized familywise error rate, multiple comparison map 
JEL:  C12 
Date:  2015–03–01 
URL:  http://d.repec.org/n?u=RePEc:pra:mprapa:64986&r=rmg 
By:  Bayai, Mohsen (Stanford University); Erdogdu, Murat A. (Stanford University); Montanari, Andrea (Stanford University) 
Abstract:  We study the fundamental problems of variance and risk estimation in high dimensional statistical modeling. In particular, we consider the problem of learning a coefficient vector Theta 0 is an element of Rp from noisy linear observations y = X Theta 0 + w is an element of Rn (p > n) and the popular estimation procedure of solving the '1penalized least squares objective known as the LASSO or Basis Pursuit DeNoising (BPDN). In this context, we develop new estimators for the '2 estimation risk k Theta b Theta 0k2 and the variance of the noise when distributions of Theta 0 and w are unknown. These can be used to select the regularization parameter optimally. Our approach combines Stein's unbiased risk estimate [Ste81] and the recent results of [BM12a] [BM12b] on the analysis of approximate message passing and the risk of LASSO. We establish highdimensional consistency of our estimators for sequences of matrices X of increasing dimensions, with independent Gaussian entries. We establish validity for a broader class of Gaussian designs, conditional on a certain conjecture from statistical physics. To the best of our knowledge, this result is the first that provides an asymptotically consistent risk estimator for the LASSO solely based on data. In addition, we demonstrate through simulations that our variance estimation outperforms several existing methods in the literature. 
Date:  2015 
URL:  http://d.repec.org/n?u=RePEc:ecl:stabus:3284&r=rmg 
By:  Takuji Arai 
Abstract:  We derive representations of local riskminimization of call and put options for BarndorffNielsen and Shephard models: jump type stochastic volatility models whose squared volatility process is given by a nonGaussian rnsteinUhlenbeck process. The general form of BarndorffNielsen and Shephard models includes two parameters: volatility risk premium $\beta$ and leverage effect $\rho$. Arai and Suzuki (2015, arxiv:1503.08589) dealt with the same problem under constraint $\beta=\frac{1}{2}$. In this paper, we relax the restriction on $\beta$; and restrict $\rho$ to $0$ instead. We introduce a Malliavin calculus under the minimal martingale measure to solve the problem. 
Date:  2015–06 
URL:  http://d.repec.org/n?u=RePEc:arx:papers:1506.01477&r=rmg 
By:  Bai, Jennie (Georgetown University); Krishnamurthy, Arvind (Stanford University); Weymuller, CharlesHenri (French Treasury) 
Abstract:  This paper expands on Brunnermeier, Gorton and Krishnamurthy (2011) and implements a liquidity measure, "Liquidity Mismatch Index (LMI)," to gauge the mismatch between the market liquidity of assets and the funding liquidity of liabilities. We construct the LMIs for 2882 bank holding companies during 20022014 and investigate the timeseries and crosssectional patterns of banks' liquidity and liquidity risk. The aggregate banking sector liquidity worsens from +$5 trillion before the crisis to $3 trillion in 2008, and reverses back to the precrisis level in 2009. We also show how a liquidity stress test can be conducted with the LMI metric, and that such a stress test as an effective macroprudential tool could have revealed the liquidity need of the banking system in the late 2007. In the cross section, we find that banks with more liquidity mismatch have a higher crash probability in the financial crisis and have a higher chance to borrow from the government during the financial crisis. Thus our LMI measure is informative regarding both individual bank liquidity risk as well as the liquidity risk of the entire banking system. 
JEL:  G21 G28 
Date:  2015–03 
URL:  http://d.repec.org/n?u=RePEc:ecl:stabus:3278&r=rmg 
By:  Mayer, Julie 
Abstract:  Cet article s’intéresse au riskselling, c’estàdire la façon dont le risk manager, en tant qu’expert des risques, tente d’influencer l’attention portée aux risques par les décideurs. La fonction de risk manager gagne progressivement sa place auprès de la Direction Générale. Alors que leur influence croît au sein des organisations, les risk managers font l’objet de peu d’études empiriques : seule une poignée de travaux aborde la façon dont ils opèrent. En outre, la littérature s’est jusqu’à présent penchée principalement sur les outils élaborés par le risk manager (Hall et al., 2015), qui ne constituent que l’un des nombreux canaux d’attention que le risk manager peut mobiliser pour exercer son influence. Dans cette recherche, nous utilisons le concept d’issueselling (Dutton & Ashford, 1993; Dutton et al., 2001), pour montrer les différentes formes d’influence du risk manager, selon les canaux d’attention mobilisés. Au travers de l’analyse de huit entretiens avec des risk managers, 12 pratiques de riskselling sont identifiées. Quatre postures d’influence émergent, en fonction de la nature du canal d’attention mobilisé et de l’intention du risk manager : la posture de superviseur, de pédagogue, d’ « impulseur », et de challenger. Cette recherche contribue ainsi à enrichir les connaissances sur le rôle du risk manager dans les décisions des entreprises, et éclaire sur la place des canaux d’attention dans le processus d’issueselling. Sur le plan managérial, les résultats constituent une matrice sur laquelle le risk manager peut se positionner pour évaluer la pertinence de ses actions d’influence. Cette recherche éclaire les entreprises sur les conditions et les moyens nécessaires au risk manager pour influencer l’attention portée aux risques dans les décisions. 
Keywords:  Risk Management; Riskselling; Issueselling; Attention; Processus de décision; 
JEL:  D81 M1 
Date:  2015–06 
URL:  http://d.repec.org/n?u=RePEc:dau:papers:123456789/15196&r=rmg 
By:  Tim Leung; Matthew Lorig 
Abstract:  We propose a flexible framework for hedging a contingent claim by holding static positions in vanilla European calls, puts, bonds, and forwards. A modelfree expression is derived for the optimal static hedging strategy that minimizes the expected squared hedging error subject to a cost constraint. The optimal hedge involves computing a number of expectations that reflect the dependence among the contingent claim and the hedging assets. We provide a general method for approximating these expectations analytically in a general Markov diffusion market. To illustrate the versatility of our approach, we present several numerical examples, including hedging pathdependent options and options written on a correlated asset. 
Date:  2015–06 
URL:  http://d.repec.org/n?u=RePEc:arx:papers:1506.02074&r=rmg 
By:  Fabio Derendinger 
Abstract:  The ability to adequately model risks is crucial for insurance companies. The method of "Copulabased hierarchical risk aggregation" by Arbenz et al. offers a flexible way in doing so and has attracted much attention recently. We briefly introduce the aggregation tree model as well as the sampling algorithm proposed by they authors. An important characteristic of the model is that the joint distribution of all risk is not fully specified unless an additional assumption (known as "conditional independence assumption") is added. We show that there is numerical evidence that the sampling algorithm yields an approximation of the distribution uniquely specified by the conditional independence assumption. We propose a modified algorithm and provide a proof that under certain conditions the said distribution is indeed approximated by our algorithm. We further determine the space of feasible distributions for a given aggregation tree model in case we drop the conditional independence assumption. We study the impact of the input parameters and the tree structure, which allows conclusions of the way the aggregation tree should be designed. 
Date:  2015–06 
URL:  http://d.repec.org/n?u=RePEc:arx:papers:1506.03564&r=rmg 
By:  Borek Vašícek; Diana Žigraiová; Marco Hoeberichts; Robert Vermeulen; Katerina Šmídková; Jakob de Haan 
Abstract:  This paper examines which variables have predictive power for financial stress in a sample of 25 OECD countries, using a recently constructed Financial Stress Index (FSI). First, we employ Bayesian model averaging to identify leading indicators of our FSI. Next, we use those indicators as explanatory variables in a panel model for all our countries and in models at the individual country level. It turns out that panel models can hardly explain FSI dynamics. Although better results are achieved in models estimated at the country level, our findings suggest that (increases in) financial stress is (are) hard to predict outofsample. 
Keywords:  financial stress index; Bayesian model averaging; early warning indicators 
JEL:  E5 G10 
Date:  2015–06 
URL:  http://d.repec.org/n?u=RePEc:dnb:dnbwpp:476&r=rmg 
By:  Beckmann, Joscha; Berger, Theo; Czudaj, Robert 
Abstract:  This study deals with the issue whether gold actually exhibits the function of a hedge or a safe haven as often referred to in the media and academia. In order to test the Baur and Lucey (2010) hypotheses, we contribute to the existing literature by the augmentation of their model to a smooth transition regression (STR) using an exponential transition function which splits the regression model into two extreme regimes. One accounts for periods in which stock returns are on average and therefore allows to test whether gold acts as a hedge for stocks, the other one accounts for periods characterized by extreme market conditions where the volatility of the stock returns is high. The latter state enables us to test whether gold can be regarded as a safe haven for stocks. The study includes a broad set of 18 individual markets as well as five regional indices and covers a sample period running from January 1970 to March 2012 on a monthly frequency. Overall, our findings show that gold serves as a hedge and a safe haven. However, this ability seems to be marketspecific. In addition, by applying a portfolio analysis we also show that our findings are useful for investors. 
Abstract:  Diese Studie befasst sich mit der Frage, ob Gold tatsächlich eine Hedge und/oder Safe HavenFunktion aufweist, wie häufig behauptet wird. Dabei werden die Hypothesen von Baur und Lucey (2010) getestet und zudem die vorhandene Literatur dahingehend erweitert, dass ihr Modell zu einem Smooth Transition Regression (STR) Ansatz unter Verwendung einer exponentiellen Übergangsfunktion modifiziert wird, die das Regressionsmodell in zwei extreme Regime unterteilt. Ein extremes Regime wird dadurch charakterisiert, dass die Aktienrenditen sich im Durchschnitt befinden und es dadurch ermöglicht wird zu prüfen, ob Gold als Absicherung für Aktien dient (HedgeFunktion). Das andere extreme Regime ist durch extreme Marktbedingungen gekennzeichnet, in denen die Volatilität der Aktienrenditen hoch ist. Der letztere Zustand ermöglicht es zu testen, ob Gold als 'sicherer Hafen' für Aktien angesehen werden kann. Die Studie umfasst eine breite Palette von 18 Einzelmärkten sowie fünf Regionalindizes und beruht auf einem Stützzeitraum von Januar 1970 bis März 2012 in monatlicher Frequenz. Insgesamt zeigen unsere Ergebnisse, dass Gold generell als Absicherung in normalen Phasen und als sicherer Hafen in Krisenzeiten dienen kann. Allerdings scheint diese Fähigkeit marktspezifisch zu sein. Darüber hinaus wird in einer PortfolioAnalyse gezeigt, dass unsere Erkenntnisse auch für Investoren mit dem Ziel der PortfolioDiversifikation nützlich sind. 
Keywords:  gold,hedge,safe haven,smooth transition,stock prices 
JEL:  G11 G14 G15 
Date:  2014 
URL:  http://d.repec.org/n?u=RePEc:zbw:rwirep:502&r=rmg 
By:  Shotts, Kenneth W. (Stanford University) 
Abstract:  I develop a simple holdup model of political risk, which can be used to explore firms' strategic options when their investments are subject to the threat of government expropriation. In the model, a firm decides whether to invest and then the government decides whether to expropriate the firm's investment or to simply collect normal taxes on its profits. The government is motivated by revenue and a wide range of nonpecuniary factors: its reputation, electoral pressures, patronage opportunities, and pressure from external actors. In the model, the likelihood of expropriation depends on the firm's profits and the amount of taxes it pays, as well as the government's political incentives. Effective management of political risk requires an integrated strategy, consisting not only of public and government relations efforts, but also financial, value chain, and human resources strategies designed to reduce the government's incentives for expropriation. 
Date:  2015–04 
URL:  http://d.repec.org/n?u=RePEc:ecl:stabus:3254&r=rmg 
By:  Daniel Felix Ahelegbey (Department of Economics, University of Venice Cà Foscari) 
Abstract:  Recent advances in empirical finance has seen a growing interest in the application of network models to analyse contagion, spillover effects and risk propagation channels in the system. While interconnectivity among financial institutions have been widely studied, only a few papers review networks in finance and they do not focus on the econometrics aspects. This paper surveys the state of the arts for statistical inference and application of networks from a multidisciplinary perspective, and specifically in the context of systemic risk. We contribute to the literature on network econometrics by relating network models to multivariate analysis with potential applications in econometrics and finance. 
Keywords:  Bayesian inference, Graphical models, Model selection, Systemic risk. 
JEL:  C11 C15 C52 G01 G17 
Date:  2015 
URL:  http://d.repec.org/n?u=RePEc:ven:wpaper:2015:13&r=rmg 
By:  Matteo Chinazzi; Stefano Pegoraro; Giorgio Fagiolo 
Abstract:  In this paper we contribute to the debate on macroprudential regulation by assessing which structure of the nancial system is more resilient to exogenous shocks, and which conditions, in terms of balance sheet compositions, capital requirements and asset prices, guarantee the higher degree of stability. We use techniques drawn from the theory of complex networks to show how contagion can propagate under dierent scenarios when the topology of the nancial system, the characteristics of the nancial institutions, and the regulations on capital are let vary. First, we benchmark our results using a simple model of contagion as the one that has been popularized by Gai and Kapadia (2010). Then, we provide a richer model in which both short and longterm interbank markets exist. By doing so, we study how liquidity shocks (de)stabilize the system under dierent market conditions. Our results demonstrate how connectivity, the topology of the markets and the characteristics of the nancial institutions interact in determining the stability of the system. 
Keywords:  financial networks, systemic risk, contagion, regulation, network topology 
Date:  2015–03–06 
URL:  http://d.repec.org/n?u=RePEc:ssa:lemwps:2015/16&r=rmg 
By:  Geetesh Bhardwaj; Gary Gorton; Geert Rouwenhorst 
Abstract:  Gorton and Rouwenhorst (2006) examined commodity futures returns over the period July 1959 to December 2004 based on an equallyweighted index. They found that fully collateralized commodity futures had historically offered the same return and Sharpe ratio as U.S. equities, but were negatively correlated with the return on stocks and bonds. Reviewing these results ten years later, we find that our conclusions largely hold up outofsample. The in and outofsample average commodity risk premiums are not significantly different, nor is the crosssectional relationship between average returns and the basis. Correlations among commodities and commodity correlations with other assets experienced a temporary increase during the financial crisis which is in line with historical experience of variation of these correlations over the business cycle. 
JEL:  G1 G11 G12 
Date:  2015–06 
URL:  http://d.repec.org/n?u=RePEc:nbr:nberwo:21243&r=rmg 
By:  Ehrmann, Michael; Ziegelmeyer, Michael (Munich Center for the Economics of Aging (MEA)) 
Abstract:  Mortgages constitute the largest part of household debt. An essential choice when taking out a mortgage is between fixedinterestrate mortgages (FRMs) and adjustableinterestrate mortgages (ARMs). However, so far, no comprehensive crosscountry study has analyzed what determines household demand for mortgage types, a task that this paper takes up using new data for the euro area. Our results support the hypothesis of Campbell and Cocco (2003) that the decision is best described as one of household risk management: income volatlity reduces the takeout of ARMs, while increasing duration and relative size of the mortgages increase it. Controlling for other supply factors through country fixed effects, loan pricing also matters, as expected, with ARMs becoming more attractive when yield spreads rise. The paper also conducts a simulation exercise to identify how the easing of monetary policy during the financial crisis affected mortgage holders. It shows that the resulting reduction in mortgage rates produced a substantial decline in debt burdens among mortgageholding households, especially in countries where households have higher debt burdens and a larger share of ARMs, as well as for some disadvantaged groups of households, such as those with low income. 
JEL:  D12 E43 E52 G21 
Date:  2014–04–14 
URL:  http://d.repec.org/n?u=RePEc:mea:meawpa:201406&r=rmg 