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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.

Suggested Citation

  • 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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    References listed on IDEAS

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    1. Giacomo Giampieri & Mark Davis & Martin Crowder, 2005. "Analysis of default data using hidden Markov models," Quantitative Finance, Taylor & Francis Journals, vol. 5(1), pages 27-34.
    2. Maria Stepanova & Lyn Thomas, 2002. "Survival Analysis Methods for Personal Loan Data," Operations Research, INFORMS, vol. 50(2), pages 277-289, April.
    3. R. M. Cyert & H. J. Davidson & G. L. Thompson, 1962. "Estimation of the Allowance for Doubtful Accounts by Markov Chains," Management Science, INFORMS, vol. 8(3), pages 287-303, April.
    4. T Bellotti & J Crook, 2009. "Credit scoring with macroeconomic variables using survival analysis," Journal of the Operational Research Society, Palgrave Macmillan;The OR Society, vol. 60(12), pages 1699-1707, December.
    5. L Quirini & L Vannucci, 2014. "Creditworthiness dynamics and Hidden Markov Models," Journal of the Operational Research Society, Palgrave Macmillan;The OR Society, vol. 65(3), pages 323-330, March.
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