Pricing Defaulted Italian Mortgages
17 Pages Posted: 8 Dec 2019 Last revised: 13 Jan 2020
Date Written: January 12, 2020
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: Suggested Citation