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Explicit Tests of Contingent Claims Models of Mortgage Default


  • Quigley, John M
  • Van Order, Robert


This paper provides explicit and powerful tests of contingent claims approaches to modeling 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 microdata: 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. Copyright 1995 by Kluwer Academic Publishers

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  • 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.
  • Handle: RePEc:kap:jrefec:v:11:y:1995:i:2:p:99-117

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    References listed on IDEAS

    1. Heckman, James & Singer, Burton, 1984. "A Method for Minimizing the Impact of Distributional Assumptions in Econometric Models for Duration Data," Econometrica, Econometric Society, vol. 52(2), pages 271-320, March.
    2. Duolao Wang & Mike Murphy, 1998. "Use of a mixture model for the analysis of contraceptive-use duration among long-term users," Journal of Applied Statistics, Taylor & Francis Journals, vol. 25(3), pages 319-332.
    3. Bolstad W. M & Manda S. O, 2001. "Investigating Child Mortality in Malawi Using Family and Community Random Effects: A Bayesian Analysis," Journal of the American Statistical Association, American Statistical Association, vol. 96, pages 12-19, March.
    4. 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.
    5. Brian A. Ciochetti & Yongheng Deng & Bin Gao & Rui Yao, 2002. "The Termination of Commercial Mortgage Contracts through Prepayment and Default: A Proportional Hazard Approach with Competing Risks," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 30(4), pages 595-633.
    6. Andreas D. Christopoulos & Robert A. Jarrow & Yildiray Yildirim, 2008. "Commercial Mortgage-Backed Securities (CMBS) and Market Efficiency with Respect to Costly Information," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 36(3), pages 441-498, September.
    7. Ciochetti, Brian A. & Deng, Yongheng & Lee, Gail & Shilling, James D. & Yao, Rui, 2003. "A Proportional Hazards Model of Commercial Mortgage Default with Originator Bias," The Journal of Real Estate Finance and Economics, Springer, vol. 27(1), pages 5-23, July.
    8. Wayne R. Archer & Peter J. Elmer & David M. Harrison & David C. Ling, 2002. "Determinants of Multifamily Mortgage Default," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 30(3), pages 445-473.
    9. Kau, James B. & Keenan, Donald C. & Muller, Walter III & Epperson, James F., 1987. "The valuation and securitization of commercial and multifamily mortgages," Journal of Banking & Finance, Elsevier, vol. 11(3), pages 525-546, September.
    10. Kerry D. Vandell, 1992. "Predicting Commercial Mortgage Foreclosure Experience," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 20(1), pages 55-88.
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