Finance and Economics Discussion Series (FEDS)
July 1997
Racial Differences in Short-Run Earnings Stability and Implications for Credit Markets
Raphael W. Bostic
Abstract:
This paper examines the claim that observed racial differences in rejection rates for mortgage applications, which persist after controlling for many relevant factors, are due to racial differences in short-run earnings stability, which has not typically been included in empirical tests. The evidence does not support the proposition that blacks suffer from greater earnings instability than comparable whites, as few consistent significant differences between black and white earnings volatility are found. Only in the case of drastic earnings shocks with persistent effects does the possibility of significant racial differences reasonably remain. In general, racial differences in earnings stability appear to be minor and are unlikely to result in substantial differences in creditworthiness.
Full paper (477 KB Postscript)Keywords: Credit risk, race, earnings variance, mortgages
PDF: Full Paper
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