Mortgage Termination: An Empirical Hazard Model with Stochastic Term Structure

J. OF REAL ESTATE FINANCE AND ECONOMICS

Posted: 19 Apr 1996

See all articles by Yongheng Deng

Yongheng Deng

Wisconsin School of Business, University of Wisconsin-Madison

Abstract

This paper presents a unified economic model of the contingent claims and competing risks of mortgage termination by prepayment and default. I adopt a proportional hazard framework to analyze these competing and interdependent risks in a model with time-varying covariates. The paper incorporates a binomial mean-reverting interest rate model into the hazard function for prepayment. The empirical results reported in the paper provide new evidence about the ruthlessness of default and prepayment behavior and the sensitivity of these decisions to demographic as well as financial phenomena. The results also illustrate that evaluating the interest rate contingent claims with a stochastic term structure has effects not only on predicting the mortgage prepayment behavior but also on predicting the mortgage default behavior.

JEL Classification: G13, C41, C14

Suggested Citation

Deng, Yongheng, Mortgage Termination: An Empirical Hazard Model with Stochastic Term Structure. J. OF REAL ESTATE FINANCE AND ECONOMICS. Available at SSRN: https://ssrn.com/abstract=7654

Yongheng Deng (Contact Author)

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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