Are the Mortgage and Capital Markets Fully Integrated? An Fractional Heteroscedastic Cointegration Analysis

In this article, monthly data on 30-year fixed-rate conventional mortgage rate and 10-year constant maturity Treasury yield for the period from April, 1971 to December, 2003 is used to test for the integration of the mortgage market with the broader capital markets. The article uses a more general concept of fractional heteroscedastic cointegration. Furthermore, an asymmetric errorcorrection model is used to model and test the possible non-linear relationship between the two series. The evidence indicates the presence of fractional heteroscedastic cointegration for the whole period as well as for both pre-deregulation (1971:04 – 1982:12) and post-deregulation (1983:01 – 2003:12) periods. The evidence from the asymmetric error-correction model indicates that the upward adjustment of the mortgage rate to disequilibrium is faster than its downward adjustment.