Commercial and Residential Mortgage Defaults: Spatial Dependence with Frailty

56 Pages Posted: 29 Mar 2021

See all articles by Andrii Babii

Andrii Babii

University of North Carolina at Chapel Hill

Xi Chen

University of North Carolina (UNC) at Chapel Hill

Eric Ghysels

University of North Carolina Kenan-Flagler Business School; University of North Carolina (UNC) at Chapel Hill - Department of Economics

Date Written: November 27, 2018

Abstract

We investigate the spatial dependence between commercial and residential mortgage defaults. A new class of observation-driven frailty factor models is introduced to do so. The idea of dynamic parameters embedded in the class of GAS models is utilized to estimate dynamic models of default risk with potentially multiple factors which are driven by stratified grouping of large panels of mortgage loan records. The score dynamics in the models is driven by so-called generalized residuals, and have therefore a fairly intuitive interpretation of ARMA-like dynamics. The asymptotic analysis recognizes the fact that we deal with both cross-sectional and time series data features. The proposed models are computationally easy to implement and therefore attractive in big data applications, something that gives them a considerable advantage in comparison to the typical latent factor frailty models proposed in the literature. Our empirical analysis demonstrates strong spatial dependence between commercial default and residential defaults.

Keywords: mortgage defaults, commercial and residential mortgages, frailty, GAS model

JEL Classification: C22, C32, C53, C55, C58, R30, G19

Suggested Citation

Babii, Andrii and Chen, Xi and Ghysels, Eric, Commercial and Residential Mortgage Defaults: Spatial Dependence with Frailty (November 27, 2018). Journal of Econometrics, Vol. 212, No. 1, 2019, Available at SSRN: https://ssrn.com/abstract=3795815

Andrii Babii (Contact Author)

University of North Carolina at Chapel Hill ( email )

Gardner Hall, CB 3305
Chapel Hill, NC 27514
United States

Xi Chen

University of North Carolina (UNC) at Chapel Hill ( email )

102 Ridge Road
Chapel Hill, NC NC 27514
United States

Eric Ghysels

University of North Carolina Kenan-Flagler Business School ( email )

Kenan-Flagler Business School
Chapel Hill, NC 27599-3490
United States

University of North Carolina (UNC) at Chapel Hill - Department of Economics ( email )

Gardner Hall, CB 3305
Chapel Hill, NC 27599
United States
919-966-5325 (Phone)
919-966-4986 (Fax)

HOME PAGE: http://https://eghysels.web.unc.edu/

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