Advances and Applications in Statistics
Volume 29, Issue 2, Pages 125 - 134
(August 2012)
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A BEHAVIOR FINANCE APPROACH FOR UNDERSTANDING PREPAYMENT PROPENSITY OF MORTGAGE LOANS
Xiangke Li and Dejun Xie
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Abstract: This work concerns the prepayment mechanism of mortgage loans from China’s market perspective. Based on a survey on borrower’s settlement decision making process conducted in Shanghai region, the study takes a behavior finance approach to address the important question that has long been a focus of both scholars and industry practitioners, i.e., what economic factors and how such factors trigger the mortgage prepayment. Three factors, namely, housing price, income level, and mortgage loan balance at market value, are identified through the study and a mathematical model is constructed to describe the borrower’s propensity to settle the mortgage loan in a lump sum at any interested time throughout the duration of contract. A steepest descent algorithm is employed for finding the parameters for the model using the data collected from the survey. The results endorse the approach used for the current study while improvement in future research is possible. |
Keywords and phrases: mortgage prepayment, income growth, housing price, behavior of loan borrowers, steepest descent. |
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