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Mortgage Terminations, Heterogeneity and the Exercise of Mortgage Options


  • Yongheng Deng
  • John M. Quigley
  • Robert Van Order


Option theory predicts that mortgage prepayment or default will be exercised by homeowners if the call or put option is sufficiently "in the money." This analysis: tests the extent to which the option approach explains default and prepayment behavior; evaluates the importance of modeling both options simultaneously; and models the unobserved heterogeneity of mortgage holders. The paper presents a unified model of the competing risks of mortgage termination, considering the hazards as dependent competing risks, estimated jointly. It also accounts for the unobserved heterogeneity among borrowers, and estimates the unobserved heterogeneity simultaneously with the prepayment and default functions.

Suggested Citation

  • Yongheng Deng & John M. Quigley & Robert Van Order, 2000. "Mortgage Terminations, Heterogeneity and the Exercise of Mortgage Options," Econometrica, Econometric Society, vol. 68(2), pages 275-308, March.
  • Handle: RePEc:ecm:emetrp:v:68:y:2000:i:2:p:275-308

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    References listed on IDEAS

    1. Chamberlain, Gary, 1987. "Asymptotic efficiency in estimation with conditional moment restrictions," Journal of Econometrics, Elsevier, vol. 34(3), pages 305-334, March.
    2. Yuichi Kitamura & Michael Stutzer, 1997. "An Information-Theoretic Alternative to Generalized Method of Moments Estimation," Econometrica, Econometric Society, vol. 65(4), pages 861-874, July.
    3. Chunrong Ai, 1997. "A Semiparametric Maximum Likelihood Estimator," Econometrica, Econometric Society, vol. 65(4), pages 933-964, July.
    4. Tripathi, Gautam & Kitamura, Yuichi, 2000. "On testing conditional moment restrictions: The canonical case," SFB 373 Discussion Papers 2000,88, Humboldt University of Berlin, Interdisciplinary Research Project 373: Quantification and Simulation of Economic Processes.
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