Macroeconomic Adverse Selection and Model Instability in Mortgage Credit Risk

23 Pages Posted: 13 Feb 2017

Date Written: February 1, 2017

Abstract

This paper explains how unobserved borrower risk factors and changing economic expectations can interact to create vintage effects and parameter instability in mortgage credit risk models. We develop a model of mortgage choice and default behavior that demonstrates how this could have led to underestimation of the risk of high LTV mortgages before the crisis. This analysis offers some guidance for reducing model risk.

Keywords: Credit risk, Credit cycle, Mortgages, Financial crisis

JEL Classification: G20, G21

Suggested Citation

Einloth, James, Macroeconomic Adverse Selection and Model Instability in Mortgage Credit Risk (February 1, 2017). Available at SSRN: https://ssrn.com/abstract=2916164 or http://dx.doi.org/10.2139/ssrn.2916164

James Einloth (Contact Author)

Independent ( email )

No Address Available

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