15 Pages Posted: 27 Apr 2006
We propose a model for the endogenous determination of an optimal refinancing policy for mortgage loans under limited refinancing opportunities. Transaction costs are also included in the analysis. A detailed examination of the optimal exercise distributions sheds light on the impact of contract features on the average prepayment behavior in mortgage-backed securities.
Keywords: Mortgages, Interest rates, Multiple optimal stopping times, Dynamic programming
JEL Classification: C31, E43, G11
Suggested Citation: Suggested Citation