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The paper studies the interaction of these forces using a quantitative model with flexible mortgage contracts, liquidity-driven household default, and a banking sector with sticky deposits. Results show U-shaped financial stability risks in mortgage fixation length, with FRMs and ARMs hedging differently, and an intermediate length stabilizing volatility and improving aggregate risk sharing.",{"@graph":69,"@context":123},[70,84,106],{"@type":71,"itemListElement":72},"BreadcrumbList",[73,77,79,82],{"item":74,"name":75,"@type":76,"position":8},"https://docshare.wps.com","Home","ListItem",{"item":78,"name":9,"@type":76,"position":14},"https://docshare.wps.com/document/",{"item":80,"name":40,"@type":76,"position":81},"https://docshare.wps.com/document/research-report/",3,{"item":83,"name":65,"@type":76,"position":19},"https://docshare.wps.com/document/mortgage-structure-financial-stability-and-risk-sharing-quantitative-model-analysis/203241/",{"url":83,"name":65,"@type":85,"image":86,"author":91,"headline":65,"publisher":94,"fileFormat":97,"inLanguage":63,"description":67,"dateModified":98,"datePublished":99,"encodingFormat":97,"isAccessibleForFree":100,"interactionStatistic":101},"DigitalDocument",{"url":87,"@type":88,"width":89,"height":90},"https://docshare.wps.com/thumbnails/mortgage-structure-financial-stability-and-risk-sharing-quantitative-model-analysis/203241.png","ImageObject",300,407,{"name":92,"@type":93},"Anda","Person",{"url":74,"name":95,"@type":96},"DocShare","Organization","application/pdf","2026-10-29","2026-09-04",true,{"@type":102,"interactionType":103,"userInteractionCount":105},"InteractionCounter",{"@type":104},"ViewAction",11,{"@type":107,"mainEntity":108},"FAQPage",[109,115,119],{"name":110,"@type":111,"acceptedAnswer":112},"How do ARMs and FRMs affect financial stability differently when interest rates rise?","Question",{"text":113,"@type":114},"ARMs directly increase household mortgage payments, which can raise defaults and bank credit losses. FRMs can shield households from payment shocks but expose lenders more to interest rate risk.","Answer",{"name":116,"@type":111,"acceptedAnswer":117},"What model components does the paper use to study mortgage structure and risk sharing?",{"text":118,"@type":114},"The paper develops a quantitative macro-finance model with flexible mortgage contracts, endogenous household default decisions driven by liquidity, and a banking sector funded with sticky deposits subject to occasionally binding constraints.",{"name":120,"@type":111,"acceptedAnswer":121},"What is the paper’s main finding about fixation length and financial sector volatility?",{"text":122,"@type":114},"Financial stability risks are U-shaped in mortgage fixation length, and an intermediate fixation length balances the competing hedging effects, minimizing sector volatility and improving aggregate risk sharing.","https://schema.org",{"og:url":83,"og:type":125,"og:title":65,"og:site_name":95,"og:description":67},"article",{"robots":127,"canonical":83},"index,follow",{"doc_id":129,"site_id":62},203241,1788557493,{"code":4,"msg":5,"data":132},{"doc_id":129,"user_id":133,"nickname":92,"user_avatar":134,"doc_module":4,"category_id":39,"category_name":40,"doc_title":65,"doc_description":67,"doc_content":135,"file_id":136,"file_url":137,"file_type":138,"file_size":139,"view_count":105,"is_deleted":4,"is_public":8,"is_downloadable":8,"audit_status":8,"page_count":140,"language":141,"language_code":63,"site_id":62,"html_lang":63,"table_of_contents":142,"faqs":143,"seo_title":144,"seo_description":67,"update_tm":130,"read_time":145,"preview_page_count":4},962075006959,"https://ap-avatar.wpscdn.com/avatar/e0002397efbe92a78e?_k=1776741047341049297","Mortgage Structure, Financial Stability, and  \nRisk Sharing ∗  \nVadim Elenev† Johns Hopkins Carey  \nLu Liu‡ Wharton  \nJuly 2025  \nAbstract  \nAdjustable-rate mortgages (ARMs) expose households to rising payments, increasing defaults, while fixed-rate mortgages (FRMs) expose lenders to greater interest rate risk. We evaluate these competing forces in a quantitative model with flexible mortgage contracts, liquidity-driven household default, and a banking sector with sticky deposits. We find financial stability risks are U-shaped in mortgage fixation length. While FRMs benefit from deposit rate stickiness, ARMs provide net worth hedging by concentrating defaultsin states when intermediary net worth is high due to increases in mortgage income. An intermediate fixation length balances these effects, minimizing financial sector volatility and improving aggregate risk sharing.  \nJEL: E52, G21, G28, R31, E44 .  \nKeywords: mortgages, financial stability, interest rate risk, credit risk, fixed-rate, adjustable-rate, risk sharing, intermediary asset pricing, household finance  \n∗ First draft: June 2024 . We thank David Berger, John Campbell, James Choi, Jo˜ao Cocco, Will Diamond, Andreas Fuster, Itay Goldstein, Jo˜ao Gomes, Urban Jermann, Amir Kermani, Arvind Krishnamurthy, Moritz Kuhn, Luc Laeven, Tim Landvoigt, Gregor Matvos, Atif Mian, Stijn Van Nieuwerburgh, Rodney Ramcharan, Alp Simsek, Adi Sunderam, Luis Viceira, Olivier Wang, our discussants Isha Agarwal, Dan Greenwald, Konstantin Milbradt, and Javier Suarez, as well as participants at the AREUEA National Conference, Stanford Junior Macro-Finance Conference, Columbia Workshop in New Empirical Finance, SFS Cavalcade, ECB Annual Conference on Financial Stability and Macroprudential Policy, WFA, NBER Summer Institute (Macro, Money and Financial Frictions), CEPR ESSFM Gerzensee, and seminar participants at Johns Hopkins Carey, CUNY Baruch, University of St. Gallen, University of Zurich, Harvard Business School, Wharton, and the Chicago Fed for helpful discussions and comments. We thank Yizhong Zhang, Yixin Gwee, Yiming Ma and Daniel Wilkerson for excellent research assistance. This paper was previously circulated under the title “A Macro-Finance Model of Mortgage Structure: Financial Stability & Risk Sharing.”  \n†Carey Business School, Johns Hopkins University. Email: [velenev@jhu.edu](velenev@jhu.edu)  \n‡The Wharton School, University of Pennsylvania. Email: [lliu1@wharton.upenn.edu](lliu1@wharton.upenn.edu)  \n1 Introduction  \nMortgage structure matters for macroeconomic outcomes. It affects the transmission of monetary policy, since adjustable-rate mortgages (ARMs) reset more immediately compared to fixed-rate mortgages (FRMs) (e.g. Calza et al. , 2013; Di Maggio et al. , 2017; Fuster and Willen, 2017; Garriga et al. , 2017) . In this paper, we show that mortgage structure also directly shapes financial stability risks. Differences in mortgage structures across countries were brought into sharp relief by the global monetary tightening cycle between 2022 to 2023 . Despite similar policy rate increases of approximately 400 to 500 basis points across major economies, mortgage payments increased by 15 to 25% in countries with ARMs (U.K., Canada, and Euro Area), while remaining stable in the U.S., where 30-year FRMs predominate (Figure 1) .  \nFigure 1: Comparison of Policy Rates and Mortgage Payments, 2022–2023  \n(a) Policy Rates (b) Measure of Mortgage Payments  \nNotes: Panel (a) shows main monetary policy rates for the United States (US), United Kingdom (UK), Euro Area (EA), and Canada (CA) . Panel (b) shows measures of average mortgage payments. EA ARM aggregates Finland, Italy and Portugal. Data sources: US: 2024Q2 revised mortgage debt service ratio (DSR) from FRED; UK: total expected (incl. agreed changes in payments e.g. due to forbearance) monthly mortgage payment from the Financial Conduct Authority (FCA); Euro Area: total DSR from BIS; Canada: average monthly scheduled outstandi","cbCaie2HRHg3AmBn","https://ap.wps.com/l/cbCaie2HRHg3AmBn","pdf",2729543,102,"English","# Abstract\n## Introduction\n## Model and Mechanisms","[{\"question\":\"How do ARMs and FRMs affect financial stability differently when interest rates rise?\",\"answer\":\"ARMs directly increase household mortgage payments, which can raise defaults and bank credit losses. FRMs can shield households from payment shocks but expose lenders more to interest rate risk.\"},{\"question\":\"What model components does the paper use to study mortgage structure and risk sharing?\",\"answer\":\"The paper develops a quantitative macro-finance model with flexible mortgage contracts, endogenous household default decisions driven by liquidity, and a banking sector funded with sticky deposits subject to occasionally binding constraints.\"},{\"question\":\"What is the paper’s main finding about fixation length and financial sector volatility?\",\"answer\":\"Financial stability risks are U-shaped in mortgage fixation length, and an intermediate fixation length balances the competing hedging effects, minimizing sector volatility and improving aggregate risk sharing.\"}]","Mortgage Structure, Financial Stability and Risk Sharing - Quantitative Model Analysis | PDF",257]