Unobserved Heterogeneity in Models of Competing Mortgage Termination Risks

31 Pages Posted: 20 Nov 2006

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

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Abstract

This article extends unobserved heterogeneity to the multinomial logit (MNL) model 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 to MNL with and without mass-point estimates of unobserved heterogeneous groups of borrowers. The mass-point mixed hazard (MMH) model 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.

Suggested Citation

Clapp, John M. and An, Xudong and Deng, Yongheng, Unobserved Heterogeneity in Models of Competing Mortgage Termination Risks. Real Estate Economics, Vol. 34, No. 2, pp. 243-273, Summer 2006. Available at SSRN: https://ssrn.com/abstract=945536 or http://dx.doi.org/10.1111/j.1540-6229.2006.00166.x

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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