Hypotheses A good and B connect to the first stage
- d P ( R 90 + i , t = step one | A we , t , Letter we , t , A good ? we , t , Letter ? i , t ) d A beneficial i , t > 0 and P ( Roentgen 90 + i , t = step one | An effective i , t , A good ? we , t , N i , t , N ? we , t ) ? 0
- d P ( Roentgen 90 + we , t = 1 | A i , t , Letter i , t , Good ? we , t , N ? we , t ) d An effective i , t ? 0
- d P ( F i , t = 1 | A i , t , Letter we , t , A beneficial ? we , t , N ? we , t , Roentgen ninety + we , t ? step 1 = step 1 ) d A great i , t > 0 and P ( F i , t = step 1 | A beneficial we , t , A ? i , t , N we , t N ? i , t , R 90 + we , t ? step 1 = 1 ) ? 0
- d P ( F i , t = step 1 | A good i , t , Letter we , t , A ? we , t , N ? we , t , Roentgen ninety + we , t ? step one = step one ) d An effective i , t ? step one = 0
Hypothesis A states that the probability of a loan entering 90+ day arrears is increasing in the size of the ability-to-pay shock and is close to 0 where the size of the shock does not exceed the borrowers’ ability-to-pay threshold. Hypothesis B states that the marginal probability of a loan entering 90+ day arrears is at best weakly related to negative equity. Under the double-trigger hypothesis, negative equity itself does not cause borrowers to enter arrears. However, previous research has suggested that borrowers may be less willing to cut back on their consumption to remain current on their repayments when they have negative equity (Gerardi et al 2018). (more…)