Pricing Defaulted Italian Mortgages

17 Pages Posted: 8 Dec 2019 Last revised: 13 Jan 2020

See all articles by Michela Pelizza

Michela Pelizza

University of Manchester, Faculty of Humanities, School of Social Sciences, Department of Economics, Students

Klaus Reiner Schenk-Hoppé

University of Manchester - Department of Economics; Norwegian School of Economics (NHH) - Department of Finance

Date Written: January 12, 2020

Abstract

Our paper forecasts expected recovery rates of defaulted Italian mortgage loans backed by either residential or commercial real estate. We apply an exponential Ornstein-Uhlenbeck process to model the price dynamics at provincial and regional level, and two haircut models to estimate the liquidation value. Compared to our findings, rating agencies such as Moody’s, which use geometric Brownian motion to model the price dynamics, paint a rosier picture with higher recovery rates. As a consequence non-performing mortgage loans held by Italian banks might be overvalued.

Keywords: Italy, defaulted mortgages, recovery rates, calibration

JEL Classification: G21, G12

Suggested Citation

Pelizza, Michela and Schenk-Hoppé, Klaus Reiner, Pricing Defaulted Italian Mortgages (January 12, 2020). Available at SSRN: https://ssrn.com/abstract=3491178 or http://dx.doi.org/10.2139/ssrn.3491178

Michela Pelizza

University of Manchester, Faculty of Humanities, School of Social Sciences, Department of Economics, Students ( email )

Arthur Lewis Building
Oxford Road
Manchester, M13 9PL
United Kingdom

Klaus Reiner Schenk-Hoppé (Contact Author)

University of Manchester - Department of Economics ( email )

Arthur Lewis Building
Oxford Road
Manchester, M13 9PL
United Kingdom

Norwegian School of Economics (NHH) - Department of Finance ( email )

Helleveien 30
N-5045 Bergen
Norway

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