The Changing Nature of Mortgage and Capital Market Integration: Testing for Asset Substitution from 1972-2008

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Economics | Social and Behavioral Sciences


Parker Wheatley, Economics


This project explores the relationship between mortgage and capital markets, focusing on the degree of integration between the two as an argument for asset substitution. The research examines whether mortgage markets are fully (or mostly) integrated with general American capital markets and when this integration occurred. The paper looks at the potential causes of integration (deregulation, market innovation, securitization, etc.) using statistical tests and regression analysis. Using data taken from the Federal Reserve Banks, this project finds more integration in later periods, in-line with previous research. In addition, the findings include an interesting development in the recent reversal of the trend toward more integration, possibly related to the sub-prime mortgage market meltdown and credit crisis which began in 2006. Especially given the current economic climate this topic is important for many people including economists, politicians, home builders, bankers and countless others for its implications on policy making and market analysis.