Adjustable and fixed interest rates mortgage markets modelling

Abstract Due to recent developments in credit markets, the interdependencies among fixed rate mortgages (FRMs) and adjustable rate mortgages (ARMs) markets are analysed in the study of the interactions within credit markets since it appears very suitable and interesting.Ameaningful and complete database of information on Financial Institutions in Italy (1997:q1–2011:q4) hold by the Banca d’Italia shows that the relative importance of these markets recently displayed significant fluctuations since in 2005 fixed interest rate mortgage loans were about 10% while in 2009 they raised up to 70%. In the context of the FRMs and ARMs characteristics in Italian markets as well as the available database, among the proposed models for the study of interconnected markets (see Brock and Hommes in Econometrica 65(5):1059–1095, 1997, J Econ Dyn Control 22:1235–1274, 1998; Dieci and Westerhoff in Appl Math Comput 215:2011–2023, 2009; J Econ Behav Organ 75(3):461–481, 2010 and related literature cited therein), the models recently developed by Casellina et al. (Comput Econ 38:221–239, 2011) is applied to test its capacity to capture the dynamics of the observed data. It is worth stressing that the involved real data (volume of contracts and average interest rate in the FRMs and ARMs markets) are not sample information but they are evaluated on the entire population. The obtained findings point out the good level to fit the interest rates dynamics. Moreover, the model captures the switching mechanism and it catches the structural breaks when they occurs.