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Modelling Prepayment and Default under Changing Credit Market Conditions for a Net Present Value Analysis

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  • Quirini Lorenzo
  • Vannucci Luigi
  • Quirini Giovanni

Abstract

A model is developed to assess the profitability of loans or mortgages with a specified repayment schedule. Financial institutions face two competing risks: default and prepayment, both influenced by the stochastic evolution of credit market conditions. This study focuses on the Random Net Present Value (RNPV) as a key performance metric. The analysis evaluates the mean and variance of the RNPV at both the individual loan level and the portfolio level, within a unified framework that accounts for borrower behavior and prevailing credit market dynamics.

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  • Quirini Lorenzo & Vannucci Luigi & Quirini Giovanni, 2025. "Modelling Prepayment and Default under Changing Credit Market Conditions for a Net Present Value Analysis," Papers 2508.07774, arXiv.org.
    • Handle: RePEc:arx:papers:2508.07774
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    File URL: http://arxiv.org/pdf/2508.07774
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