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Estimating Dynamic Models with Aggregate Shocks And an Application to Mortgage Default in Colombia

Juan Esteban Carranza and Salvador Navarro ()

Borradores de Economía y Finanzas from Universidad Icesi

Abstract: We estimate a dynamic model of mortgage default for a cohort of Colombian debtors between 1997 and 2004. We use the estimated model to study the efects on default of a class of policies that afected the evolution of mortgage balances in Colombia during the 1990's. We propose a framework for estimating dynamic behavioral models accounting for the presence of unobserved state variables that are correlated across individuals and across time periods. We extend the standard literature on the structural estimation of dynamic models by incorporating an unobserved common correlated shock that afects all individuals' static payofs and the dynamic continuation payofs associated with diferent decisions. Given a standard parametric specification the dynamic problem, we show that the aggregate shocks are identifed from the variation in the observed aggregate behavior. The shocks and their transition are separately identifed, provided there is enough cross-sectional variation of the observed states

Keywords: Dynamic discrete probit; Mortgage (search for similar items in EconPapers)
JEL-codes: D10 L11 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-dge, nep-ecm and nep-ure
Date: 2010-06-22
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Related works:
Working Paper: Estimating dynamic models with aggregate shocks and an application to mortgage default in Colombia (2010)
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Persistent link: https://EconPapers.repec.org/RePEc:col:000130:007140

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