Planning Your Own Debt

18 Pages Posted: 21 Jan 2003

See all articles by Soren S. Nielsen

Soren S. Nielsen

Technical University of Denmark - Informatics and Mathematical Modeling

Rolf Poulsen

University of Copenhagen - Department of Statistics and Operations Research

Abstract

We model the Danish market for mortgage backed securities with a two-factor interest rate model and use a stochastic programming approach to analyse how an individual home-owner should initially compose and subsequently re-adjust his mortgage in an optimal way. Results show that the 'rules of thumb' used by financial institutions are reasonable, although best suited for more aggressive mortgagors, for whom the delivery option is of some value. More risk-averse investors should also re-adjust frequently, but use more diversified portfolios. Results are insensitive to whether a one- or two-factor model is used, provided the former is suitably calibrated.

Suggested Citation

Nielsen, Soren S. and Poulsen, Rolf, Planning Your Own Debt. European Financial Management, Vol. 8, pp. 193-210, 2002. Available at SSRN: https://ssrn.com/abstract=313447

Soren S. Nielsen

Technical University of Denmark - Informatics and Mathematical Modeling ( email )

Asmussens Alle, Building 305
DK-2300 Lyngby, DE Copenhagen DK-2300
Denmark

Rolf Poulsen (Contact Author)

University of Copenhagen - Department of Statistics and Operations Research ( email )

Universitetsparken 5
DK-2100
Denmark
+45 (353) 20685 (Phone)

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