Abstract
The Eleventh District Cost of Funds Index (COFI) is a popular index for pricing adjustable-rate mortgages. COFI is calculated from the interest expenses incurred by thrifts when raising funds. It is a mixture of current and past interest rates on many different financial instruments. COFI can be modelled well with simple econometric models. Commonly used, simple COFI models are compared using a method developed by Hendry (1989). Some of these models, which appear to fit the data well, have nonrobust parameters, significant serial correlation, and heteroscedastic errors. These poorly specified models may lead to systematic mispricing of COFI mortgages. Once a robust econometric model is chose, the lagged adjustment of COFI to movements in interest rates can be incorporated into mortgage pricing models.
This is a preview of subscription content, log in via an institution to check access.
Similar content being viewed by others
References
Asay, M. “How ARMS Move.”Secondary Mortgage Markets 2 (Winter 1985/1986), 7–13.
Christie, A. “The Stochastic Behavior of Common Stock Variances.”Journal of Financial Economics 10 (December 1982), 407–432.
Cornell, B. “Forecasting the Eleventh District Cost of Funds.”Housing Finance Review 6 (Summer 1987), 123–135.
Crockett, J., Nothaft, F. and Wang, G. “Temporal Relationships Among Adjustable-Rate Mortgage Indexes: A Time Series Analysis.” Working paper, Federal Home Loan Mortgage Corporation, December 1989.
Gilbert, C. “Professor Hendry's Econometric Methodology.”Oxford Bulletin of Economics and Statistics 48, (August 1986), 283–307.
Hendry, D.PC-GIVE: An Interactive Econometric Modelling System. University of Oxford, 1989.
Hendry, D. and Ericsson, N. “An Econometric Analysis of U.K. Money Demand inMonetary Trends in the United States and the United Kingdom by Milton Friedman and Anna J. Schwartz.”American Economic Review 81 (March 1991), 8–38.
Hendry, D. and Richard, J. “On the Formulation of Empirical Models in Dynamic Econometrics.”Journal of Econometrics 20 (October 1982), 3–33.
Judge, G., Griffiths, W.E., Hill, R.C. et al.The Theory and Practice of Econometrics. New York: John Wiley and Sons, 1985.
Kau, J., Keenan, D., Muller, W. and Epperson, J. “The Valuation and Analysis of Adjustable Rate Mortgages.”Management Science 36 (December 1990), 1417–1431.
Nothaft, F. “COFI ARMs: Seeing into the Future.”Mortgage Banking 50 (January 1990), 43–47.
Nothaft, F. and Wang, G. “Forecasting Cost-of-Funds at Thrift Institutions: Implications for the Adjustable-Rate Mortgage Market.” Working paper, Federal Home Loan Mortgage Corporation, October 1990.
Passmore, S.W. “The Eleventh District Cost of Funds Index: Description, Forecasting and Pricing Index-Based Mortgages.” Working paper, Economics Department, Federal Home Loan Bank of San Francisco, August 1989.
Passmore, S.W. “Econometric Models of The Eleventh District Cost of Funds Index.” Working paper, Economics Department, Federal Home Loan Bank of San Francisco, May 1990.
Plosser, C.I. and Schwert, G.W. “Money, Income and Sunspots: Measuring Economic Relationships and the Effects of Differencing.”Journal of Monetary Economics 4 (November 1978), 637–660.
Roll, R. “Adjustable Rate Mortgages: The Indexes.”Housing Finance Review 6 (Summer 1987), 137–152.
Wang, G. “A Model-Based Adjustment Procedure for Cost of Funds Ratios.”Federal Home Loan Bank Board Journal 16 (January 1983), 37.
Author information
Authors and Affiliations
Rights and permissions
About this article
Cite this article
Passmore, S.W. Econometric models of the Eleventh District Cost of Funds Index. J Real Estate Finan Econ 6, 175–188 (1993). https://doi.org/10.1007/BF01097025
Issue Date:
DOI: https://doi.org/10.1007/BF01097025