Simulation Solution to a Two-Dimensional Mortgage Refinancing Problem

Dejun Xie (), Nan Zhang () and David A. Edwards ()
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Dejun Xie: South University of Science and Technology of China
Nan Zhang: Xian Jiaotong-Liverpool University
David A. Edwards: University of Delaware

Computational Economics, 2018, vol. 52, issue 2, No 8, 479-492

Abstract: Abstract This work studies a mortgage borrower’s optimal refinancing strategy, which is formulated as the solution to a stochastic minimization problem with contingent conditions. The problem is framed in a business economic environment where the underlying discounting factor and mortgage interest rate are assumed to follow a two-dimensional stochastic process of Vasicek type. A complete Monte Carlo algorithm is developed and implemented. This algorithm generates the optimal refinancing surface as a function of time and the risk-free rate. Numerical examples with financial implications are provided.

Keywords: Mortgage refinancing; Stochastic modeling; Monte Carlo simulation; Financial optimization (search for similar items in EconPapers)
Date: 2018
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DOI: 10.1007/s10614-017-9689-1

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