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Mortgage Terminations: The Role of Conditional Volatility


  • David M. Harrison

    () (University of Vermont, Burlington, VT 05405-0157)

  • Thomas G. Noordewier

    () (University of Vermont, Burlington, VT 05405-0157)

  • K. Ramagopal

    () (University of Vermont, Burlington, VT 05405-0157)


This article is the winner of the Real Estate Finance manuscript prize (sponsored by Fannie Mae Foundation) presented at the 2001 American Real Estate Society Annual Meeting. Studies of mortgage termination decisions typically rely on a competing risks framework comparing defaults and prepayments. While useful tools have been developed to approximate the values of these competing default and prepayment options, the available metrics do not adequately account for the role of the conditional volatility of interest rates and housing prices in option valuation. Using a sample of 1,428 mortgage loan payment histories, this study finds that exponential GARCH estimates of the conditional volatility of housing prices and interest rates influence mortgage termination decisions in a predictable manner. Specifically, increased housing price volatility is shown to enhance default option values, while increased interest rate volatility is shown to enhance prepayment option values. Therefore, it would appear that conditional volatility represents a more refined input into the competing risks option framework.

Suggested Citation

  • David M. Harrison & Thomas G. Noordewier & K. Ramagopal, 2002. "Mortgage Terminations: The Role of Conditional Volatility," Journal of Real Estate Research, American Real Estate Society, vol. 23(1/2), pages 89-110.
  • Handle: RePEc:jre:issued:v:23:n:1/2:2002:p:89-110

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    References listed on IDEAS

    1. Nelson, Daniel B, 1991. "Conditional Heteroskedasticity in Asset Returns: A New Approach," Econometrica, Econometric Society, vol. 59(2), pages 347-370, March.
    2. Bollerslev, Tim, 1986. "Generalized autoregressive conditional heteroskedasticity," Journal of Econometrics, Elsevier, vol. 31(3), pages 307-327, April.
    3. Kim, Dongcheol & Kon, Stanley J, 1994. "Alternative Models for the Conditional Heteroscedasticity of Stock Returns," The Journal of Business, University of Chicago Press, vol. 67(4), pages 563-598, October.
    4. Deng, Yongheng, 1997. "Mortgage Termination: An Empirical Hazard Model with a Stochastic Term Structure," The Journal of Real Estate Finance and Economics, Springer, vol. 14(3), pages 309-331, May.
    5. Deng, Yongheng & Quigley, John M. & Van Order, Robert & Mac, Freddie, 1996. "Mortgage default and low downpayment loans: The costs of public subsidy," Regional Science and Urban Economics, Elsevier, vol. 26(3-4), pages 263-285, June.
    6. Dennis R. Capozza & Dick Kazarian & Thomas A. Thomson, 1998. "The Conditional Probability of Mortgage Default," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 26(3), pages 259-289.
    7. Engle, Robert F, 1982. "Autoregressive Conditional Heteroscedasticity with Estimates of the Variance of United Kingdom Inflation," Econometrica, Econometric Society, vol. 50(4), pages 987-1007, July.
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    Cited by:

    1. Su Han Chan & Fang Fang & Jing Yang, 2008. "Presales, Financing Constraints and Developers?Production Decisions," Journal of Real Estate Research, American Real Estate Society, vol. 30(3), pages 345-376.
    2. Norman G. Miller & Michael A. Sklarz & Thomas G. Thibodeau, 2005. "The Impact of Interest Rates and Employment on Nominal Housing Prices," International Real Estate Review, Asian Real Estate Society, vol. 8(1), pages 27-43.

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    JEL classification:

    • L85 - Industrial Organization - - Industry Studies: Services - - - Real Estate Services


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