Doctoral thesis

Essays in household finance and monetary policy transmission


126 p

Thèse de doctorat: Università della Svizzera italiana, 2020

English This thesis consists of three chapters that contribute to two fundamental questions in finance: how households make financial decisions and how market prices react to uninformative demand shocks. The first chapter investigates how household respond to mortgage refinancing incentives. A well-documented finding in household finance is that many borrowers miss out on substantial savings by failing to refinance their mortgage when interest rates decline. Yet, we know little about the determinants of households refinancing decisions. I exploit the unique design of mortgages in the UK to identify reference dependence as an important source of inaction. Consistent with the prediction of prospect theory and the asymmetric treatment of out-of-pocket costs and opportunity costs, the evidence suggests that forgone savings are not perceived as actual losses. Mortgage refinancing is an important channel for monetary policy transmission and the results provide novel evidence of a behavioral friction to the pass-through of low interest rates. The second paper, co-authored with Loriana Pelizzon and Alberto Plazzi, studies the timing of mortgage default when borrowers face the threat of recourse by lenders. We document that the majority of defaults happen when home equity is positive. We also find that equity at default is significantly negatively related to household income at origination, which is consistent with the threat of recourse being greater for financially constrained borrowers with a higher marginal utility of consumption. The evidence is consistent with borrowers preferring to forego their equity in the house in order to avoid facing income garnishment in case of default once they are underwater. Finally, the third chapter, co-authored with Andrea Barbon, provides new insights on how quantitative easing works from the large-scale purchases of equity ETFs by the Bank of Japan. We exploit the cross-sectional heterogeneity of the supply shock to identify a positive and persistent impact on stock prices, consistent with a portfolio balance channel. The evidence suggests that long-run demand curves for stocks are downward sloping with unitary price elasticity. Moreover, we are able to quantify the effect of the intervention, showing that the purchases of ETFs tracking the price-weighted Nikkei 225 generate pricing distortions relative to a value-weighted benchmark.
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