Frictions, Heterogeneity and Optimality in Mortgage Modeling

James Kau () and Slawson, V Carlos,

The Journal of Real Estate Finance and Economics, 2002, vol. 24, issue 3, 239-60

Abstract: The purpose of this article is to provide a unified framework for incorporating frictions into a theoretical options-pricing model (OPM) for mortgages. This article presents formulation for a frictions-adjustable mortgage model that integrates borrower heterogeneity while simultaneously preserving prepayment and default financial decisions. Our model demonstrates the flexibility of the OPM by simulating separate and concurrent effects of three categories of frictions on the mortgage and mortgage components. Researchers can use our example formulation to determine the effects of specific borrower characteristics on mortgage values without destroying the options theoretic framework. Copyright 2002 by Kluwer Academic Publishers

Date: 2002
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The Journal of Real Estate Finance and Economics is currently edited by Steven R. Grenadier, James B. Kau and C.F. Sirmans

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