Mortgage Termination: An Empirical Hazard Model with Stochastic Term Structure
J. OF REAL ESTATE FINANCE AND ECONOMICS
Posted: 19 Apr 1996
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: Suggested Citation