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Could the Trigger to the Subprime Crisis Have Been Predicted? A Mortgage Risk Modeling ApproachJose Molina UtrillaUniversity of Essex - Centre for Computational Finance and Economic Agents Nick ConstantinouUniversity of Essex - Essex Business School November 22, 2010 Abstract: The abnormally high mortgage default rates that became apparent in early 2007 were not foreseen in June 2005, when mortgage production in the US reached its peak. Could the significant increase in mortgage defaults that triggered the resultant subprime crisis, have been predicted? This paper develops a mortgage-level predictive model for mortgage default and delinquency rates, based on a logistic regression and Markov chain framework. The results are compared against actual fixed rate mortgage-level default data and provide strong evidence that the high US nonprime mortgage default rates were predictable in mid-2005 using historical data only available at the time.
Number of Pages in PDF File: 31 Keywords: Default Probabilities, Logistic Regression, Markov Chain, Credit Risk JEL Classification: G01, G17, G32 working papers seriesDate posted: May 28, 2010 ; Last revised: April 24, 2011Suggested CitationContact Information
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