Unobserved Heterogeneity in Models of Competing Mortgage Termination

41 Pages Posted: 5 Mar 2004

See all articles by John M. Clapp

John M. Clapp

University of Connecticut - Department of Finance

Xudong An

Federal Reserve Banks - Federal Reserve Bank of Philadelphia

Yongheng Deng

Wisconsin School of Business, University of Wisconsin-Madison

Date Written: August 22, 2005

Abstract

This paper extends unobserved heterogeneity to the multinomial logit model (MNL) framework in the context of mortgages terminated by refinance, move, or default. It tests for the importance of unobserved heterogeneity when borrower characteristics such as income, age and credit score are included to capture lender-observed heterogeneity. It does this by comparing the proportional hazard model (PHM) to MNL with and without mass-point estimates of unobserved heterogeneous groups of borrowers.

The mass point mixed hazard model (MMH) yields larger and more significant coefficients for several important variables in the move model, whereas the MNL model without unobserved heterogeneity performs well with the refinance estimates. The MMH clearly dominates the alternative models in-sample and out-of-sample. However, it is sometimes difficult to obtain convergence for the models estimated jointly with mass points.

Keywords: Mortgage termination risks, Cox Proportional Hazard Model (CPH), Multinomial Logit Model (MNL), Out-of-sample prediction; Unobserved heterogeneity

JEL Classification: G21, C25, C41, C52, D12

Suggested Citation

Clapp, John M. and An, Xudong and Deng, Yongheng, Unobserved Heterogeneity in Models of Competing Mortgage Termination (August 22, 2005). Available at SSRN: https://ssrn.com/abstract=512624 or http://dx.doi.org/10.2139/ssrn.512624

John M. Clapp (Contact Author)

University of Connecticut - Department of Finance ( email )

School of Business
2100 Hillside Road
Storrs, CT 06269
United States
860-486-5057 (Phone)
860-486-0349 (Fax)

Xudong An

Federal Reserve Banks - Federal Reserve Bank of Philadelphia ( email )

Ten Independence Mall
Philadelphia, PA 19106-1574
United States

Yongheng Deng

Wisconsin School of Business, University of Wisconsin-Madison ( email )

4110 Grainger Hall
975 University Avenue
Madison, WI 53706
United States
+1 (608) 262-4865 (Phone)

HOME PAGE: http://https://bus.wisc.edu/faculty/yongheng-deng

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