Advanced Search
MyIDEAS: Login to save this paper or follow this series

Optimal Mortgage Refinancing: A Closed Form Solution

Contents:

Author Info

  • Sumit Agarwal
  • John C. Driscoll
  • David Laibson

Abstract

We derive the first closed-form optimal mortgage refinancing rule. The expression is derived by using the Lambert-W function to solve a tractable class of mortgage refinancing problems. We calibrate our solution and show that our quantitative results closely match those reported by researchers who use numerical methods.

Download Info

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
File URL: http://www.nber.org/papers/w13487.pdf
Download Restriction: no

Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 13487.

as in new window
Length:
Date of creation: Oct 2007
Date of revision:
Publication status: published as Sumit Agarwal & John C. Driscoll & David I. Laibson, 2013. "Optimal Mortgage Refinancing: A Closed‐Form Solution," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 45, pages 591-622, 06.
Handle: RePEc:nbr:nberwo:13487

Note: AP EFG PE
Contact details of provider:
Postal: National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.
Phone: 617-868-3900
Email:
Web page: http://www.nber.org
More information through EDIRC

Related research

Keywords:

Other versions of this item:

Find related papers by JEL classification:

This paper has been announced in the following NEP Reports:

References

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
as in new window
  1. Kenneth B. Dunn & Chester S. Spatt, 2005. "The Effect of Refinancing Costs and Market Imperfections on the Optimal Call Strategy and the Pricing of Debt Contracts," Real Estate Economics, American Real Estate and Urban Economics Association, American Real Estate and Urban Economics Association, vol. 33(4), pages 595-617, December.
  2. Dunn, Kenneth B & McConnell, John J, 1981. "Valuation of GNMA Mortgage-Backed Securities," Journal of Finance, American Finance Association, American Finance Association, vol. 36(3), pages 599-616, June.
  3. Xavier Gabaix & Arvind Krishnamurthy & Olivier Vigneron, 2007. "Limits of Arbitrage: Theory and Evidence from the Mortgage-Backed Securities Market," Journal of Finance, American Finance Association, American Finance Association, vol. 62(2), pages 557-595, 04.
  4. Quigley, John M, 1987. "Interest Rate Variations, Mortgage Prepayments and Household Mobility," The Review of Economics and Statistics, MIT Press, vol. 69(4), pages 636-43, November.
  5. Chris Downing & Richard Stanton & Nancy Wallace, 2005. "An Empirical Test of a Two-Factor Mortgage Valuation Model: How Much Do House Prices Matter?," Real Estate Economics, American Real Estate and Urban Economics Association, American Real Estate and Urban Economics Association, vol. 33(4), pages 681-710, December.
  6. Bennett, Paul & Peach, Richard & Peristiani, Stavros, 2001. "Structural Change in the Mortgage Market and the Propensity to Refinance," Journal of Money, Credit and Banking, Blackwell Publishing, Blackwell Publishing, vol. 33(4), pages 955-75, November.
  7. John Y. Campbell, 2006. "Household Finance," Journal of Finance, American Finance Association, American Finance Association, vol. 61(4), pages 1553-1604, 08.
  8. Eduardo S. Schwartz & Walter N. Torous, 1993. "Mortgage Prepayment and Default Decisions: A Poisson Regression Approach," Real Estate Economics, American Real Estate and Urban Economics Association, American Real Estate and Urban Economics Association, vol. 21(4), pages 431-449.
  9. Yongheng Deng & John M. Quigley & Robert Van Order, . "Mortgage Terminations, Heterogeneity and the Exercise of Mortgage Options," Zell/Lurie Center Working Papers 322, Wharton School Samuel Zell and Robert Lurie Real Estate Center, University of Pennsylvania.
  10. Li, Minqiang & Pearson, Neil D. & Poteshman, Allen M., 2004. "Conditional estimation of diffusion processes," Journal of Financial Economics, Elsevier, Elsevier, vol. 74(1), pages 31-66, October.
  11. Green, Jerry & Shoven, John B, 1986. "The Effects of Interest Rates on Mortgage Prepayments," Journal of Money, Credit and Banking, Blackwell Publishing, Blackwell Publishing, vol. 18(1), pages 41-59, February.
  12. John P. Harding, 1997. "Estimating Borrower Mobility from Observed Prepayments," Real Estate Economics, American Real Estate and Urban Economics Association, American Real Estate and Urban Economics Association, vol. 25(3), pages 347-371.
  13. Wayne R. Archer & David C. Ling, 1993. "Pricing Mortgage-Backed Securities: Integrating Optimal Call and Empirical Models of Prepayment," Real Estate Economics, American Real Estate and Urban Economics Association, American Real Estate and Urban Economics Association, vol. 21(4), pages 373-404.
  14. Schwartz, Eduardo S & Torous, Walter N, 1992. "Prepayment, Default, and the Valuation of Mortgage Pass-through Securities," The Journal of Business, University of Chicago Press, vol. 65(2), pages 221-39, April.
  15. Hurst, Erik & Stafford, Frank, 2004. "Home Is Where the Equity Is: Mortgage Refinancing and Household Consumption," Journal of Money, Credit and Banking, Blackwell Publishing, Blackwell Publishing, vol. 36(6), pages 985-1014, December.
  16. Patric H. Hendershott & Robert Van Order, 1987. "Pricing Mortgages: An Interpretation of the Models and Results," NBER Working Papers 2290, National Bureau of Economic Research, Inc.
  17. Caplin, Andrew & Freeman, Charles & Tracy, Joseph, 1997. "Collateral Damage: Refinancing Constraints and Regional Recessions," Journal of Money, Credit and Banking, Blackwell Publishing, Blackwell Publishing, vol. 29(4), pages 496-516, November.
  18. Xavier Gabaix & David Laibson, 2005. "Shrouded Attributes, Consumer Myopia, and Information Suppression in Competitive Markets," NBER Working Papers 11755, National Bureau of Economic Research, Inc.
  19. Follain, James R & Scott, Louis O & Yang, T L Tyler, 1992. "Microfoundations of a Mortgage Prepayment Function," The Journal of Real Estate Finance and Economics, Springer, Springer, vol. 5(2), pages 197-217, June.
  20. Giliberto, S Michael & Thibodeau, Thomas G, 1989. "Modeling Conventional Residential Mortgage Refinancings," The Journal of Real Estate Finance and Economics, Springer, Springer, vol. 2(4), pages 285-99, December.
  21. Green, Richard K. & LaCour-Little, Michael, 1999. "Some Truths about Ostriches: Who Doesn't Prepay Their Mortgages and Why They Don't," Journal of Housing Economics, Elsevier, Elsevier, vol. 8(3), pages 233-248, September.
  22. Yan Chang & Abdullah Yavas, 2009. "Do Borrowers Make Rational Choices on Points and Refinancing?," Real Estate Economics, American Real Estate and Urban Economics Association, American Real Estate and Urban Economics Association, vol. 37(4), pages 635-658.
  23. Stanton, Richard, 1995. "Rational Prepayment and the Valuation Mortgage-Backed Securities," Review of Financial Studies, Society for Financial Studies, Society for Financial Studies, vol. 8(3), pages 677-708.
  24. Paul Bennett & Richard Peach & Stavros Peristiani, 1998. "Implied mortgage refinancing thresholds," Staff Reports, Federal Reserve Bank of New York 49, Federal Reserve Bank of New York.
  25. Andrew H. Chen & David C. Ling, 1989. "Optimal Mortgage Refinancing with Stochastic Interest Rates," Real Estate Economics, American Real Estate and Urban Economics Association, American Real Estate and Urban Economics Association, vol. 17(3), pages 278-299.
Full references (including those not matched with items on IDEAS)

Citations

Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
as in new window

Cited by:
  1. Luigi Guiso & Paolo Sodini, 2012. "Household Finance. An Emerging Field," EIEF Working Papers Series 1204, Einaudi Institute for Economics and Finance (EIEF), revised Mar 2012.
  2. Benjamin J. Keys & Devin G. Pope & Jaren C. Pope, 2014. "Failure to Refinance," NBER Working Papers 20401, National Bureau of Economic Research, Inc.
  3. Werner Hürlimann, 2012. "Valuation of fixed and variable rate mortgages: binomial tree versus analytical approximations," Decisions in Economics and Finance, Springer, Springer, vol. 35(2), pages 171-202, November.
  4. Khandani, Amir E. & Lo, Andrew W. & Merton, Robert C., 2013. "Systemic risk and the refinancing ratchet effect," Journal of Financial Economics, Elsevier, Elsevier, vol. 108(1), pages 29-45.
  5. Barry Bosworth & Rosanna Smart, 2009. "The Wealth of Older Americans and the Sub-Prime Debacle The Wealth of Older Americans and the Sub-Prime Debacle," Working Papers, Center for Retirement Research at Boston College wp2009-21, Center for Retirement Research, revised Nov 2009.
  6. Aytek Malkhozov & Philippe Mueller & Andrea Vedolin & Gyuri Venter, 2013. "Mortgage Hedging in Fixed Income Markets," FMG Discussion Papers, Financial Markets Group dp722, Financial Markets Group.
  7. Sumit Agarwal & Richard J. Rosen & Vincent Yao, 2013. "Why do borrowers make mortgage refinancing mistakes?," Working Paper Series, Federal Reserve Bank of Chicago WP-2013-02, Federal Reserve Bank of Chicago.
  8. Toshio Kimura & Naoki Makimoto, 2008. "Optimal Mortgage Refinancing with Regime Switches," Asia-Pacific Financial Markets, Springer, Springer, vol. 15(1), pages 47-65, March.

Lists

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

Statistics

Access and download statistics

Corrections

When requesting a correction, please mention this item's handle: RePEc:nbr:nberwo:13487. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ().

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.