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Finance and Economics Discussion Series
The Finance and Economics Discussion Series logo links to FEDS home page 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.

Keywords: Credit risk, race, earnings variance, mortgages

Full paper (202 KB PDF) | Full paper (477 KB Postscript)

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Last update: August 4, 1997