Papers by Robert Van Order
It is shown in this paper that firms may achieve a zero-profit local Nash equilibrium in a multi-... more It is shown in this paper that firms may achieve a zero-profit local Nash equilibrium in a multi-characteristics product-differentiated market even though there exists another Nash equilibrium for the same number of firms in which profits are positive, as can happen in a locational model. This gives rise to the possibility of innovative-entry, in which entry occurs although all profits in the industry are zero, because an entrepreneur perceives the profit possibilities in an alternative structure. It is argued that innovative entry situations are more likely in characteristics space than in real locational space because the industry configuration is more difficult to observe in the former case.
Social Science Research Network, 2016
This paper studies the evolution of property values and the connections between shadow banking an... more This paper studies the evolution of property values and the connections between shadow banking and property markets in China. We use Pooled Mean Group estimation to analyze Chinese house prices in 65 cities from 2007-2016, define the "fundamentals" of housing prices with the Gordon dividend discount model, and use lagged rents, prices, real and nominal interest rates, and shadow banking activity as short term explanatory factors. We find that the cities tend to share long run fundamentals and adjust relatively quickly to deviations from the fundamentals. We do not find bubbles; rather houses are like growth stocks with house prices rapidly chasing growing rents. More importantly, we find that house prices increase more quickly with the availability of shadow banking funds, which have grown rapidly.
Understanding mortgage markets requires understanding the changing roles of and the competition b... more Understanding mortgage markets requires understanding the changing roles of and the competition between the primary and secondary markets. A description of the competitive structure of the mortgage market can be summarized as one of dueling charters. Of the two major charters in the industry, one is for depositories (banks and thrifts), which have been traditionally identified as the primary market, and the other is for the government-sponsored enterprises (Fannie Mae and Freddie Mac), which operate a secondary market. However, the distinction between primary and secondary markets has grown less important than that between charters. Today there are basically two different ways (e.g., via a bank or via Freddie Mac) of moving money from the capital markets to the mortgage market. The competitive balance in the industry depends on which charter’s route is cheaper, primarily in terms of fund-raising and controlling risk. The competition between the charters can be modeled as the balance between the lower costs of the secondary market and the selection advantages of the primary market. This article develops a framework for understanding the evolution and structure of American mortgage markets by modeling this balance and discussing how it has changed over time.
Proceedings of the 5th European Real Estate Society Conference - Maastricht, The Netherlands, 1998
Mortgage Lending, Racial Discrimination, and Federal Policy, 2018
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Not too long ago the US housing finance system, dominated by the “Agencies, ” Fannie Mae,
The Journal of Real Estate Finance and Economics, 2018
The recent surge in property values in China has been similar to the surge in the U.S before the ... more The recent surge in property values in China has been similar to the surge in the U.S before the crash in 2007. This raises concerns about whether China is destined to have a crash as well. We estimate similar models of property values for the two countries, in order to compare price dynamics side by side. We find little in common between them. In the U.S. the adjustment process appears prone to Bbubbles^in the sense of strong momentum, but Chinese prices have been generally mean reverting, without momentum. This suggests that the recent price rise in China has had more to do with scarcity than with irrational exuberance.
The Journal of Risk Model Validation, 2008
SSRN Electronic Journal, 2008
We document that technical progress in originating and pricing mortgages has enabled a trend sinc... more We document that technical progress in originating and pricing mortgages has enabled a trend since 1979 toward more relaxed credit standards on mortgage lending, which is reflected in rising foreclosure rates. We then decompose annual variation in mortgage performance measured by share of loans entering foreclosure into a part due to economic conditions and a part due to underwriting changes. The decomposition provides natural metrics or indices of national underwriting quality and economic conditions. The results suggest that the recent subprime debacle can be attributed about equally to each factor. The deterioration since 1990 was marked by two periods. In the first, during the 1990s, there was a lowering of observable credit standards, like loan to value ratios. It was deliberate and related to the use of credit scores and the development of more sophisticated underwriting systems. The negative effects of eroding loan quality on foreclosures were to some extent masked by strong local and national economic conditions during this period. In the second period, after 2004, there was little change in observable loan characteristics like loan to value or credit history. This second period is associated with the rise of subprime and Alt-A markets but also with subprime and other "non-agency" securitization. Securitization induced moral hazard and a deterioration in underwriting standards that was not easily observed by investors in the securities.
SSRN Electronic Journal, 2007
This paper presents a simple version of the application of option based pricing models to mortgag... more This paper presents a simple version of the application of option based pricing models to mortgage credit risk. The approach is based on the notion that default can be viewed as exercising a put option, and that the place to look in modelling default is the extent to which the option is in the money (the extent to which the borrower has negative equity in the property) and, given that, the incentive, e.g., a trigger event and inability to withstand it, to exercise the option. The main focus is on how the probability of default can be estimated and how the default risk can be priced. The analysis considers both "first principles" and specific analysis about U. S. default experience.
The American Mortgage System, 2011
SSRN Electronic Journal, 2014
ABSTRACT This paper models incentives for risk-taking by managers of banks or securitization deal... more ABSTRACT This paper models incentives for risk-taking by managers of banks or securitization deals. Of particular interest are risk-retention rules for producers of structured securitization deals, which have been mandated by the Dodd-Frank Act; the model can also be applied to bank managers. We show how incentives can be set up so that problems of asymmetric information can co-exist with socially optimal risk-taking. The role of holding an equity piece as an incentive tool has been overemphasized ; the best " skin in the game " incentive structure for management is to hold securities of all levels of risk, including the safest piece. As a device for protecting against bank runs, the best incentive tools require tilting the incentive structure toward the safest pieces, but not by much.
SSRN Electronic Journal, 2014
ABSTRACT This paper analyzes endogeneity and identification in models that estimate the effects o... more ABSTRACT This paper analyzes endogeneity and identification in models that estimate the effects of instrument choice on performance. Such models occur frequently in analysis of effectiveness of economic policy, happiness and determinants of shareholder value. Based on a direct application of the envelope theorem, we propose an impossibility theorem in estimation of such models: (1) identification is not generally possible, (2) the expected values of estimated impacts of choice variables are exactly zero in a well specified model, and (3) making use of instrumental variables cannot solve the problem. We follow with four applications to empirical work in economics and finance, including testing the " Lucas Critique " .
The New Palgrave Dictionary of Economics
SSRN Electronic Journal, 2014
This paper studies U.S. house prices across 45 metropolitan areas from 1980-2012. It applies the ... more This paper studies U.S. house prices across 45 metropolitan areas from 1980-2012. It applies the Gordon dividend discount model as a measure of long run "fundamentals", and uses mean group and pooled mean group estimation to get long run and short run estimates of determinants of house prices. We find great similarity across cities in that the long run house prices are largely explained by the same fundamentals, but adjust to the fundamentals slowly, at a rate of around 10% per year. We find sharp differences in short run adjustments (momentum) across cities, and the differences are correlated with local supply elasticities. Analysis of residuals suggests strong cyclical deviations. The bubble period (2000-2006) was longer than usual and was extended after 2002 when it looked to be dying out, in a way that is coincident with the rise in subprime securitization from 2003-2006.
SSRN Electronic Journal, 2001
ABSTRACT This paper models the structure of a financial market that is composed of two types of i... more ABSTRACT This paper models the structure of a financial market that is composed of two types of institutions, banks and securities or secondary markets. The model analyzes the development of the securities market as a way of trading off its lower cost of securitization with adverse selection due to asymmetric information possessed by banks, using a simple adverse selection model in the tradition of Akerlof (1970). Successive modifications, including licensing contracts similar to those of Leland (1979) and Chan and Leland (1982) solve some of the adverse selection problems by "licensing"loan sellers in an effort to provide minimum quality standards.
SSRN Electronic Journal, 2006
We examine the history of U.S. mortgage as a means of illustrating the influence of different asp... more We examine the history of U.S. mortgage as a means of illustrating the influence of different aspects of the U.S. common law system on financial development. We hypothesize that the value of common law to financial development is with respect to the flexibility that the system provides market participants as they attempt to respond to shocks. This is in contrast to civil law, which tends to specify particular contracts as admissible. The model is an application of the Le Chatelier Principle, which suggests that adding constraints to system makes it's responses less elastic. We consider a special case of restrictions on mortgage type (fixed vs adjustable rate) to illustrate the principle.
SSRN Electronic Journal, 2006
A REGIME SHIFT MODEL OF THE RECENT HOUSING BUBBLE IN THE UNITED STATES It has been widely assumed... more A REGIME SHIFT MODEL OF THE RECENT HOUSING BUBBLE IN THE UNITED STATES It has been widely assumed that there was a bubble in the U.S. housing market after1999. This paper analyzes the extent to which that was true. We define a bubble as: (1) a regime shift that is characterized by a change in the properties of deviations from the fundamentals of house price growth, and (2) where a shock to the fundamental equation is more self sustaining and volatile than in other periods. We model the fundamentals of price growth as a lagged adjustment of prices to the expected present value of future rent. We then study the autoregressive behavior of the residuals thus generated. We look at changes in momentum (the extent to which a shock to house price growth leads to further increases in house price growth) of the residuals. Our results from 44 Metropolitan Statistical Areas for the period of 1980-2005 (quarterly data) are mixed. There is evidence of momentum in house price growth throughout the period, and momentum did increase after 1999, indicating a regime shift; but by a modest amount, and while momentum was sometimes strong it was not explosive. The regime shift was less apparent in the likely bubble candidate cities along the coasts, which had shown high growth in the past. The evidence on volatility is strong. In general, volatility did not increase in the nonbubble MSAs, and it decreased in the faster-growing bubble MSAs.
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Papers by Robert Van Order