Estimating the Marginal Contribution of Adjustable-Rate Mortgage Selection to Termination Probabilities in a Nested Model
In this study we measure the marginal contribution of ARMs to termination probabilities. To do this we develop a modified nested-logit model of mortgage selection and termination and identify the role of risk aversity in the selection process. Simulations of termination probabilities under different economic scenarios indicate how ARMs decrease overall portfolio risk through declines in prepayment probabilities which more than offset the increases in default probabilities associated with them. Copyright 1992 by Kluwer Academic Publishers
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