OPTIMAL CROSS-CURRENCY MORTGAGE DECISIONS

LÃœTKEBOHMERT Eva, Thorsten Schmidt () and Tianjiao Zhu ()
Additional contact information
LÃœTKEBOHMERT Eva: Department of Quantitative Finance, Institute for Economic Research, University of Freiburg, Rempartstr. 16, 79098 Freiburg, Germany
Thorsten Schmidt: Department of Mathematical Stochastics, Mathematical Institute, University of Freiburg, Ernst-Zermelo-Str. 1, 79104 Freiburg, Germany
Tianjiao Zhu: Department of Quantitative Finance, Institute for Economic Research, University of Freiburg, Rempartstr. 16, 79098 Freiburg, Germany
Authors registered in the RePEc Author Service: Eva Lütkebohmert

International Journal of Theoretical and Applied Finance (IJTAF), 2022, vol. 25, issue 03, 1-31

Abstract: In this paper, we study optimal mortgage decisions in a cross-currency setting. In particular, we address the question on how a household should optimally split its mortgage portfolio in a fixed rate mortgage in the domestic currency and an adjustable rate mortgage denominated in a foreign currency subject to some risk constraints. We propose an affine factor model which allows to jointly investigate the impact of variations in interest rates as well as of exchange rate fluctuations on mortgage decisions. As a case study, we apply our model to real data on Swiss and German mortgage markets and we estimate parameters using a quasi-Kalman filter approach. We then study the impact of different income splits, risk attitudes, and mortgage specifications on the household’s portfolio choice in a mean–variance optimization approach.

Keywords: Affine models; exchange rate risk; interest rate risk; mortgage portfolio choice; quasi-Kalman filter (search for similar items in EconPapers)
Date: 2022
References: Add references at CitEc
Citations:

Downloads: (external link)
http://www.worldscientific.com/doi/abs/10.1142/S0219024922500108
Access to full text is restricted to subscribers

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:wsi:ijtafx:v:25:y:2022:i:03:n:s0219024922500108

Ordering information: This journal article can be ordered from

DOI: 10.1142/S0219024922500108

Access Statistics for this article

International Journal of Theoretical and Applied Finance (IJTAF) is currently edited by L P Hughston

More articles in International Journal of Theoretical and Applied Finance (IJTAF) from World Scientific Publishing Co. Pte. Ltd.
Bibliographic data for series maintained by Tai Tone Lim ().