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The Third Trigger of Strategic Default: Households’ Portfolio Composition

Author

Listed:
  • Shotaro Watanabe
  • Gianluca Marcato
  • Bing Zhu

Abstract

This paper investigates the relationship between strategic default in the US residential mortgage market and household portfolio composition after the Great Recession in 2007. Following the definition of strategic default proposed by Gerardi et al. (2018), we find that in addition to the well-known ‘Double Triggers’ – negative equity and payment ability – households’ portfolio composition can also affect their strategic default decision. Holding a larger amount of non-housing durable assets increases the probability of strategic default, while owning more liquid assets can reduce it through two channels: portfolio rebalancing and relative cost of default.

Suggested Citation

  • Shotaro Watanabe & Gianluca Marcato & Bing Zhu, 2021. "The Third Trigger of Strategic Default: Households’ Portfolio Composition," ERES eres2021_203, European Real Estate Society (ERES).
    • Handle: RePEc:arz:wpaper:eres2021_203
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    More about this item

    Keywords

    Household Finance; Mortgage; Negative Equity; Strategic Default;
    All these keywords.

    JEL classification:

    • R3 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Real Estate Markets, Spatial Production Analysis, and Firm Location

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