Explicit Tests of Contingent Claims Models of Mortgage Defaults
AbstractThis paper provides explicit and powerful tests of contingent claims approaches to modelling mortgage default. We investigate a model of frictionless default (i.e., one in which transactions costs, reputation costs and moving costs play no role) and analyze its implications -- the relationship between equity and default, the timing of default, its dependence upon initial conditions, and the severity of losses. Absent transactions costs and other market imperfections, economic theory makes well-defined predictions about these various outcomes. The empirical analysis is based upon two particularly rich bodies of micro data: one indicating the default and loss experience of all mortgages purchased by the Federal Home Mortgage Corporation (Freddie Mac); and a large sample of all repeat sales of single family houses whose mortgages were purchased by Freddie mac since 1976.
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Bibliographic InfoPaper provided by University of California at Berkeley in its series Economics Working Papers with number 93-221.
Date of creation: 01 Nov 1993
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Postal: University of California at Berkeley, Berkeley, CA USA
Web page: http://www.haas.berkeley.edu/groups/iber/wps/econwp.html
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Postal: IBER, F502 Haas Building, University of California, Berkeley CA 94720-1922
Other versions of this item:
- Quigley, John M & Van Order, Robert, 1995. "Explicit Tests of Contingent Claims Models of Mortgage Default," The Journal of Real Estate Finance and Economics, Springer, vol. 11(2), pages 99-117, September.
- Quigley, John M., 1993. "Explicit Tests of Contingent Claims Models of Mortgage Defaults," Department of Economics, Working Paper Series qt3df5357v, Department of Economics, Institute for Business and Economic Research, UC Berkeley.
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