The main aims of this study are grouped into the following list:
– To link interest rates resets to other risk triggers relevant for risk assessment models, such as stress tests.
– To test the significance of the correlation between LTV-, LTI-ratios, choice of mortgage contract and the exposure to interest rate risk.
– To figure out how exposure to interest rate risk depends on households’ characteristics and other observables.
– Try to isolate causality among risk triggers.
Further, I try to elaborate a specific policy recommendation, related to the households’ probability of default and their exposure (loss given default – LGD). This issue is highly relevant in the context of the stress test literature where probabilities of default and losses given defaults are taken as orthogonal. However, if we were to find that only households with large risk exposures have high chances to default, the stress stemming out of these tests could be greatly underestimated. In order to answer the central questions of this Master’s thesis I started with a description of the current situation and outlining of relevant problems on the Dutch mortgage market. Chapter II includes the literature review on the core topic. There, I provided comprehensive analysis of risk factors and discussed the influence of risk-aversion and behavior patterns on the choices made by households, as well as shortly outlined why households prefer mortgages with adjustable interest rates (ARM) to the ones with fixed interest rate (FRM) and under what circumstances. Further, in Chapter III a detailed description of the data and methodology is provided. Chapter IV concentrates on the proposed econometric model and discussion of the main results. Finally, in the conclusion, I give a summarizing assessment and provide tentative answers to the previously discussed research issues.