Well Armed and Firm: Diversification of Mortgage Loans for Homeowners

Journal of Risk, Vol. 10(1), pp. 1--19, 2007

22 Pages Posted: 27 Jun 2006 Last revised: 13 Oct 2015

See all articles by Stavros A. Zenios

Stavros A. Zenios

University of Cyprus; Bruegel; University of Pennsylvania - Wharton Financial Institutions Center

Kourosh Marjani Rasmussen

Technical University of Denmark

Date Written: May 1, 2006

Abstract

Individual homeowners are offered today a wide range of mortgage options for financing the purchase of a house. Usually, homeowners are also granted an option to repay the mortgage loan, and in some countries - such as Denmark - it is particularly efficient to do so as market conditions change or the homeowner's situation warrants it. And while, traditionally, a single mortgage loan would serve borrower needs, today it appears that a portfolio of loans may satisfy much better the mortgage needs of the individual and his or her appetite for risk. In this paper we develop a model for the diversification of mortgage loans of a homeowner and apply it to data from the Danish market. Even in the presence of mortgage origination costs it is shown that most risk averse homeowners will do well to consider a diversified portfolio of both fixed (FRM) and adjustable (ARM) rate mortgages. This is particularly so if one takes, unavoidably, a long term perspective in financing the purchase of a home through a mortgage loan.

Keywords: Mortgages, risk management, Conditional Value-at-Risk, optimization

JEL Classification: C15, C61, G11, G21

Suggested Citation

Zenios, Stavros A. and Rasmussen, Kourosh Marjani, Well Armed and Firm: Diversification of Mortgage Loans for Homeowners (May 1, 2006). Journal of Risk, Vol. 10(1), pp. 1--19, 2007, Available at SSRN: https://ssrn.com/abstract=911921 or http://dx.doi.org/10.2139/ssrn.911921

Stavros A. Zenios (Contact Author)

University of Cyprus ( email )

75 Kallipoleos Street
P.O. Box 20537
Nicosia CY-1678
Cyprus
+357 2 893605 (Phone)

HOME PAGE: http://https://www.researchgate.net/profile/Stavros_Zenios

Bruegel ( email )

Rue de la Charité 33
B-1210 Brussels Belgium, 1210
Belgium

University of Pennsylvania - Wharton Financial Institutions Center ( email )

3733 Spruce Street
Philadelphia, PA 19104-6374
United States

HOME PAGE: http://zenios.wordpress.com

Kourosh Marjani Rasmussen

Technical University of Denmark ( email )

Anker Engelunds Vej 1
Building 101A
Lyngby, 2800
Denmark

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