The integration of mortgage and capital markets: a tale of two administrations

Abstract

Purpose This study aims to extend the literature by exploring the degrees of integration of both fixed and adjustable mortgage rates and diverse riskless (Treasury) and risky (corporate) interest rates in the capital markets from January 1, 2010, until November 7, 2018. This period is uniquely characterized by a sharp conversion on January 20, 2017, from enhanced financial regulation during the Obama administration to major deregulatory ambitions during the first 22 months of the Trump administration. Design/methodology/approach The authors use the augmented Dickey and Fuller and the Phillips and Perron unit root tests to examine time series stationarity and the Johansen cointegration rank and the Stock-Watson common trends tests to inspect various cointegrations and regressions of time series pairs to explore different effects. The authors deploy these techniques over the entire time frame, as well as for distinct sub-periods of similar length. Findings The authors conclude that a deregulatory setting favors cointegration between mortgage and non-corporate capital markets. However, an enriched regulatory environment supports cointegration between mortgage and corporate capital markets. In addition, the Dodd-Frank Wall Street Reform and Consumer protection Act from July 21, 2010, created a unique though short-term effect on the relationships between Treasury and corporate bonds and fixed-rate mortgages. Practical implications The journey contributes to the overall understanding of the interactions among US financial markets. They are considered efficient, competitive and fully developed if their prices quickly adjust to economic changes and regulatory transformations. Originality/value The authors study the degrees of integration of various conventional and adjustable mortgage rates and different fixed and floating interest rates in the US capital markets from January 1, 2010, until November 7, 2018. This recent time frame has yet to be examined in the economic literature. This period is also characterized by a sharp transformation on January 20, 2017, from enhanced financial regulation during the Obama administration to major deregulatory drives during the first 22 months of the Trump administration.