collateral damage refinancing constraints and regional recessions in the current structure of the u s residential mortgage market a decrease in property values may make it very difficult for homeowners to refinance their mortgages to take advantage of declining interest rates in this papr we show that this form of collateral constraint has greatly reduced refinancing in statds with depressed property markets we outline the interaction between regional recessions and refinancing constraints when adverse economic shocks cause property values in a region to decrease the damage to the collateral makes it difficult or impossible for some homeowners to obtain new mortgages in the recent period this has meant that homeowners in economically depressed regions have been unable to refinance their mortgages to take advantage of declining interest rates this inability to refinance has further economic impacts on the region through lowering the wealth and the discretionary income of local homeowners thereby deepening the regional recession while the possible link between regional declines in property values and refinancing activity has been understood for some time for example monsen 1992 the subject has received very little empirical attention we provide the first quantitative assessment of the impact of constraints arising from regional property market dynamics on refinancing activity to accomplish this we use a new data set on more than thirty five thousand individual mortgages the sample consists of all mortgages serviced by chemical bank with originations between june 1989 and may 1992

connectedness of economic policy uncertainty and oil price shocks in a time domain perspective abstract in this paper we investigate causality and connectedness between economic policy uncertainty and oil price shocks across time scales by incorporating the wavelet approach into the structural vector autoregression var framework proposed by diebold and yilmaz 2009 2012 2014 we find that crude oil prices behave like receivers of information from economic policy uncertainty regardless of time scale however the causality relationship between economic policy uncertainty and oil price shocks intensifies as time scales increase in addition the connectedness relationship is robust to time scale changes whereas the causal relationship intensifies as time scales increase notably the weight of us economic policy uncertainty increases in the var system as time scales increase in particular we employ the west texas intermediate wti crude oil price as an alternative measure to increase the robustness of our results and identify differences in the var system overall the total connectedness of the wti crude oil price is lower than that of the brent crude oil price regardless of time scale our results provide meaningful information for both investors and policymakers

interest rates and equity extraction during the housing boom credit record panel data from 1999 2010 indicates that the likelihood of home equity extraction borrowing on average about 40 000 against one s home peaked in 2003 when mortgage rates reached historic lows we estimate a 27 percent rise in extraction in response to a 100 basis point rate decline and that house price growth amplifies this relationship differential responses to interest rates and home price appreciation by borrower age and credit score provide new evidence of financial frictions finally equity extractions are associated with higher default risk consistent with the use of borrowed funds for consumption or illiquid investment

availability of mortgage loans in volatile real estate markets abstract this paper presents a default model for mortgages on single family houses implying a higher probability of negative equity and thus default in real estate markets with high price volatility mortgage lenders compensate for the increased default probability in volatile markets by demanding higher downpayments or increased creditworthiness of loan applicants thus making mortgage loans more difficult to obtain an empirical analysis finds greatly varying price volatility in single family real estate markets in a sample of 42 cities consistent with the implications of the model the empirical analysis finds that the fraction of low downpayment loans declines in volatile markets

adjustable and fixed rate mortgages as a screening mechanism for default risk abstract this paper studies how borrowers with different levels of default risk would self select between fixed rate mortgages frms and adjustable rate mortgages arms we show that under asymmetric information where the risk type of a borrower is private information to the borrower and not known by the lender the unique equilibrium may be a separating equilibrium in which the high risk low risk borrowers choose arms frm s thus the borrower s mortgage choice will serve as a signal of default risk enabling lenders to screen high risk and low risk borrowers it is possible for the separating equilibrium to yield positive economic profits for lenders in a competitive market it is also possible to have a unique pooling equilibrium where all borrowers choose either frms or arms the model implies that an increase in the proportion of high risks will increase the likelihood of a separating equilibrium where both mortgage types are offered also a uniform downward shift in the expected change in the interest rate or an increase in borrowers current or future incomes make arms more attractive for both types of borrowers

an optimal design of collateralized mortgage obligation with pac companion structure using dynamic cash reserve abstract this paper presents a model for optimally designing a collateralized mortgage obligation cmo with a planned amortization class pac companion structure using dynamic cash reserve in this structure the mortgage pool s cash flow is allocated by rule to the two bond classes such that pac bondholders receive substantial prepayment protection that protection being provided by the companion bondholders the structure we propose provides greater protection to the pac bondholders than current structures during periods of rising interest rates when this class of bondholders faces greater extension risk we do so by allowing a portion of the cash flow from the collateral to be reserved to meet the pac s scheduled cash flow in subsequent periods the greater protection is provided by the companion bondholders exposure to interest loss to tackle this problem we transform the problem of designing the optimal pac companion structure into a standard stochastic linear programming problem which can be solved efficiently moreover we present an extended model by considering the quality of the companion bond and by relaxing the pac bondholder shortfall constraint based on numerical experiments through monte carlo simulation we show the utility of the proposed model

oil and the macroeconomy since world war ii all but one of the u s recessions since world war ii have been preceded typically with a lag of around three fourths of a year by a dramatic increase in the price of crude petroleum this does not mean that oil shocks caused these recessions evidence is presented however that even over the period 1948 72 this correlation is statistically significant and nonspurious supporting the proposition that oil shocks were a contributing factor in at least some of the u s recessions prior to 1972 by extension energy price increases may account for much of post opec macroeconomic performance

disability transfers and the work decision of older men the potential causal relationship between the availability and generosity of disability transfers and the nonparticipation rates of older men is often asserted and much studied parsons 1980 haveman and wolfe 1984 leonard 1986 however estimates of the magnitude of this linkage vary widely the growth in transfer availability and generosity has been credited with from 30 to 100 percent of the significant post 1960 fall in older male participation rates the disparity in these research results stems primarily from 1 alternative sources of data that differentially constrain estimation of relevant expected wage and transfer incomes 2 specifications that are unable to distinguish income transfer from labor market effects and 3 reliance on measures of health status that are endogenous to the work leisure decision this study seeks to narrow the range of estimates by addressing each of these issues our utility maximization model of work status choice assumes that workers who differ in health status choose between the mutually exclusive options of working at the wage offered for their characteristics and accepting public or private disability transfers because the income flows in the two options are censored they are estimated using switching regression techniques as expectations conditional on exogenous individual characteristics hence accounting for the potentially endogenous process that separates wage earners from transfer recipients the marginal utilities of income from the two sources are allowed to differ because of stigma effects in the estimation we adjust the choice based nature of our sample employ longitudinal earnings data to measure expected changes in as distinct from the expected level of income in the two options and use a separately estimated latent health status measure largely purged of its endogeneity with the participation decision

health longevity and retirement reform abstract in this paper we study alternative retirement reforms designed to achieve fiscal sustainability in the face of demographic change we are particularly interested in the heterogeneous effects across demographic groups as improvements in health and longevity have not been uniform across the population to this end we develop a dynamic structural life cycle model of heterogeneous agents who face health mortality and income risk we consider the following policy reform measures 1 increasing the early access age to old age retirement 2 raising income taxes 3 lowering old age retirement benefits and 4 lowering old age retirement and disability benefits we find that of the considered policies proportionally lowering old age retirement and disability benefits results in the highest average welfare for all education categories it is also the most successful at boosting employment

the role of labor and marriage markets preference heterogeneity and the welfare system in the life cycle decisions of black hispanic and white women using data from the nlsy79 we structurally estimate a dynamic model of the life cycle decisions of young women the women make sequential joint decisions about school attendance work marriage fertility and welfare participation we use the model to perform counterfactual simulations designed to shed light on three questions 1 how much of observed minority majority differences in behavior can be attributed to differences in labor market opportunities marriage market opportunities and preference heterogeneity 2 how does the welfare system interact with these factors to augment those differences 3 how can new cohorts that grow up under the new welfare system temporary aid for needy families be expected to behave compared to older cohorts

stochastic house appreciation and optimal mortgage lending w e characterize the optimal mortgage contract in a continuous time setting with stochastic growth in house price and income costly foreclosure and a risky borrower who requires incentives to repay his debt we show that many features of subprime loans can be consistent with properties of the optimal contract and that when house prices decline mortgage modification can create value for borrowers and lenders our model provides a number of empirical predictions that relate the features of mortgage contracts originated in a housing boom and the extent of their modification in a slump to location and borrowers characteristics jel g20 g21 g33

recourse and residential mortgage default evidence from us states we quantify the effect of recourse on default and find that recourse affects default by lowering the borrower s sensitivity to negative equity at the mean value of the default option for defaulted loans borrowers are 30 more likely to default in non recourse states furthermore for homes appraised at 500 000 to 750 000 borrowers are twice as likely to default in non recourse states we also find that defaults are more likely to occur through a lender friendly procedure such as a deed in lieu in states that allow deficiency judgments we find no evidence that mortgage interest rates are lower in recourse states the author 2011 published by oxford university press on behalf of the society for financial studies all rights reserved for permissions please e mail journals permissions oup com oxford university press

understanding welfare stigma taxpayer resentment and statistical discrimination abstract welfare stigma is widely regarded to be of central importance in understanding the impact of welfare programs in their goal of alleviating poverty it affects both the decision to take up benefits and the well being of those who actually do this paper develops alternative models of the determinants of welfare stigma we identify two views a statistical discrimination approach and a taxpayer resentment view we discuss how each may be formalized and derive their implications we then examine what they imply about the relationship between stigma and program design

reconciling theory and empirics on the role of unemployment in mortgage default abstract empirical models of mortgage default typically find that the influence of unemployment is negligible compared to other well known risk factors such as high borrower leverage or low borrower fico scores this is at odds with theory which assigns a critical role to unemployment in the decision to stop payment on a mortgage we help reconcile this divergence by employing a novel empirical strategy involving simulated unemployment histories to measure the severity of attenuation bias in loan level estimations of default risk due to a borrower becoming unemployed attenuation bias results because individual data on unemployment status is unobserved requiring that a market wide unemployment rate be used as a proxy attenuation is extreme with our results suggesting that the use of an aggregate unemployment rate in lieu of actual borrower unemployment status results in default risk from a borrower becoming unemployed being underestimated by a factor more than 100 in addition our analysis indicates that adding the unemployment rate as a proxy for the missing borrower specific unemployment indicator does not improve the accuracy of the estimated model over the specification without the proxy variable included hence aggregate portfolio level risk estimates for mortgage guarantors such as fha also are not improved these views represent those of the authors and not necessarily those of the federal reserve bank of new york or the federal reserve system this is a revised version of a paper that previously circulated under the title unemployment and unobserved credit risk in the fha single family mortgage insurance fund nber working paper no 18880 john grigsby provided excellent research assistance we appreciate the helpful comments of andrew haughwout wilbert van der klaauw the editor stuart rosenthal and referees but remain responsible for any errors

real estate prices and bank stability abstract real estate prices can deviate from their fundamental value due to rigid supply heterogeneity in quality and various market imperfections which have two contrasting effects on bank stability higher prices increase the value of collateral and net wealth of borrowers and thus reduce the likelihood of credit defaults in contrast persistent deviations from fundamentals may foster the adverse selection of increasingly risky creditors by banks seeking to expand their loan portfolios which increases bank distress probabilities we test these hypotheses using unique data on real estate markets and banks in germany house price deviations contribute to bank instability but nominal house price developments do not this finding corroborates the importance of deviations from the fundamental value of real estate rather than just price levels or changes alone when assessing bank stability

oil price shocks and policy uncertainty new evidence on the effects of us and non us oil production important interaction has been established for us economic policy uncertainty with a number of economic and financial variables including oil prices this paper examines the dynamic effects of us and non us oil production shocks on economic policy uncertainty using a structural var model such an examination is motivated by the substantial increases in us oil production in recent years with implications for us political and economic security positive innovations in us oil production are associated with decreases in us economic policy uncertainty the economic forecast interquartile ranges about the us cpi and about federal state local government expenditures are particularly sensitive to innovations in us oil supply shocks shocks to us oil supply disruption causes rises in the cpi forecast uncertainty and accounts for 21 of the overall variation of the cpi forecaster disagreement dis aggregation of oil production shocks into us and non us oil production yields novel results oil supply shocks identified by us and non us origins explain as much of the variation in economic policy uncertainty as structural shocks on the demand side of the oil market

subprime mortgages and the housing bubble this paper explores the link between the house price expectations of mortgage lenders and the extent of subprime lending it argues that bubble conditions in the housing market are likely to spur subprime lending with favorable price expectations easing the default concerns of lenders and thus increasing their willingness to extend loans to risky borrowers since the demand created by subprime lending feeds back onto house prices such lending also helps to fuel an emerging housing bubble these ideas are illustrated in a theoretical model and tentative support is found in empirical work exploring the connection between price expectations and the extent of subprime lending the views expressed in this paper are those of the authors and do not necessarily reflect those of the federal reserve bank of philadelphia the federal reserve board of governors or the federal reserve system this paper is available free of charge at http www philadelphiafed org research and data publications working papers

the effects of health insurance and self insurance on retirement behavior this paper provides an empirical analysis of the effects of employer provided health insurance medicare and social security on retirement behavior using data from the health and retirement study we estimate a dynamic programming model of retirement that accounts for both saving and uncertain medical expenses our results suggest that medicare is important for understanding retirement behavior and that uncertainty and saving are both important for understanding the labor supply responses to medicare half the value placed by a typical worker on his employer provided health insurance is the value of reduced medical expense risk raising the medicare eligibility age from 65 to 67 leads individuals to work an additional 0 074 years over ages 60 69 in comparison eliminating 2 years worth of social security benefits increases years of work by 0 076 years

a life cycle model of unemployment and disability insurance abstract a general equilibrium life cycle model is developed in which individuals choose a sequence of saving and labor supply faced with search frictions and uncertainty in longevity health status and medical expenditures unemployed individuals decide whether to apply for disability insurance di benefits if eligible we investigate the effects of cash transfer and in kind medicare component of the di system on the life cycle employment without medicare benefits di coverage could fall significantly we also study how di interacts with reforms of social security and medicare and find that di enrollment amplifies the effects of reforms

disability retirement in a welfare state the increasing number of disability pensioners may put a strain on the welfare state in this paper we try to assess the effect of financial incentives on disability entrance a sample of norwegians on long term sick leave at the beginning of 1989 is examined as of the end of 1989 and the exit routes are studied in a multinomial logit model the results indicate that the incentive effects of wages are larger than the disincentive effects of benefits furthermore there is no evidence that having a subjective diagnosis affects the probability of becoming a disability pensioner jel classification h55 i18 j26

measuring financial asset return and volatility spillovers with application to global equity markets we provide a simple and intuitive measure of interdependence of asset returns and or volatilities in particular we formulate and examine precise and separate measures of return spillovers and volatility spillovers our framework facilitates study of both non crisis and crisis episodes including trends and bursts in spillovers and both turn out to be empirically important in particular in an analysis of sixteen global equity markets from the early 1990s to the present we find striking evidence of divergent behavior in the dynamics of return spillovers vs volatility spillovers return spillovers display a gently increasing trend but no bursts whereas volatility spillovers display no trend but clear bursts

oil price forecastability and economic uncertainty information on economic policy uncertainty does matter in predicting the change in oil prices we compare the forecastability of standard bayesian and time varying var against univariate models the time varying var model outranks all alternative models over the period 2007 1 2014 2

disability insurance and the dynamics of the incentive insurance trade off we provide a life cycle framework for comparing insurance and disincentive effects of disability benefits the risks that individuals face and the parameters of the disability insurance di program are estimated from consumption health disability insurance and wage data we characterize the effects of disability insurance and study how policy reforms impact behavior and welfare di features high rejection rates of disabled applicants and some acceptance of healthy applicants despite worse incentives welfare increases as programs become less strict or generosity increases disability insurance interacts with welfare programs making unconditional means tested programs more generous improves disability insurance targeting and increases welfare

risk based pricing and the enhancement of mortgage credit availability among underserved and higher credit risk populations this paper estimates an option based hazard model of the competing risks of fha mortgage termination results indicate that the elevated default risks of loans originated among lower credit quality and minority borrowers are more than offset by the damped prepayment speeds of those loans so as to result in markedly lower loan termination probabilities among underserved borrower groups those damped termination risks translate into sizable reductions in risk premia to investors in simulated lower creditquality mortgage pools empirical findings suggest that such pooling and risk based pricing of fha insured mortgages could serve to substantially reduce housing finance costs among underserved borrowers so as to advance both their homeownership opportunities and related federal housing policy objectives

monetary policy response to oil price shocks how should monetary authorities react to an oil price shock this paper shows that in a noncompetitive economy policies that perfectly stabilize prices entail large welfare costs hence explaining the reluctance of policymakers to enforce them the policy trade off is nontrivial because oil energy is an input to both production and consumption as welfare maximizing policies are hard to implement and communicate i derive a simple interest rate rule that depends only on observables but mimics the optimal plan in all dimensions the optimal rule is hard on core inflation but accommodates oil price changes

oil prices and economic activity an asymmetric cointegration approach the aim of this paper is to study the long term relationship between oil prices and economic activity proxied by gdp to account for asymmetries existing in the links between the two variables we propose an approach based on asymmetric cointegration our empirical analysis concerns the u s economy but also the g7 europe and euro area economies results indicate that while standard cointegration is rejected there is evidence for asymmetric cointegration between oil prices and gdp

how social security and medicare affect retirement behavior in a world of incomplete markets this paper provides an empirical analysis of how the u s social security and medicare insurance system affect the labor supply of older males in the presence of incomplete markets for loans annuities and health insurance we estimate a detailed dynamic programming dp model of the joint labor supply and social security acceptance decision focusing on a sample of males in the low to middle income brackets whose only pension is social security the dp model delivers a rich set of predictions about the dynamics of retirement behavior and comparisons of actual vs predicted behavior show that the dp model is able to account for wide variety of phenomena observed in the data including the pronounced peaks in the distribution of retirement ages at 62 and 65 the ages of early and normal eligibility for social security benefits respectively we identify a significant fraction of health insurance constrained individuals who have no form of retiree health insurance other than medicare and who can only obtain fairly priced private health insurance via their employer s group health plan the combination of significant individual risk aversion and a long tailed pareto distribution of health care expenditures implies that there is a significant security value for these individuals to remain employed until they are eligible for medicare coverage at age 65 overall our model suggests that a number of heretofore puzzling aspects of retirement behavior can be viewed as artifacts of particular details of the social security rules whose incentive effects are especially strong for lower income individuals and those who do not have access to fairly priced loans annuities and health insurance

asymmetric risk spillover between financial market uncertainty and the carbon market a gas dcs copula approach abstract a thorough understanding the asymmetry in risk transferring mechanisms remains a challenge in the carbon market through the incorporation of the asymmetric tail distribution into the risk transferring mechanism the asymmetric response of the carbon market to financial market uncertainties can be explored herein we propose a generalized autoregressive score dynamic conditional score copula model to investigate the asymmetric risk spillover between financial market uncertainty and the carbon market we discover the existence of considerable asymmetric risk spillover from financial market uncertainty to the carbon market specifically the upper tail risk spillover effect is greater than the lower tail risk spillover effect the degree of risk spillover reached a peak during the european debt crisis also higher degrees of financial market uncertainty and especially uncertainty from the crude oil market cause a greater risk spillover to the carbon market than lower degrees of financial market uncertainty do in addition we discover that stock market uncertainty exhibits greater power than crude oil market uncertainty in transferring risk to the carbon market when systemic events occur our research provides meaningful information to investors and policy makers

the value of embedded real options evidence from consumer automobile lease contracts under the common assumption of constant interest rates we show that penalties for early termination of a lease are often structured in such a way that the cancellation option embedded in consumer automotive leases has little value furthermore our estimates drawn from a sample of three popular car models over 1990 to 2000 indicate that the stand alone value of the lease end purchase option is on average about 16 of the market value of underlying used vehicles or about 1 462 per contract finally we examine the sensitivity of our option value estimates to model parameters and default risk recent years have witnessed a dramatic growth in the leasing of automobiles for instance overall industry sales data indicate that about a third of the new vehicles and trucks sold in the united states are leased hendel and lizzeri 2002 and miller 1995 and the federal reserve board survey of family finances reports that the use of leased vehicles by individuals nonbusiness consumers has risen from 2 9 to 5 8 over the 1992 to 2001 period azicorbe kennickell and moore 2003 consumer automobile lease contracts for new cars often include two embedded options that are not associated with a typical debt contract the first is a cancellation option that allows the lessee to terminate the lease early the second is a european call option which gives the lessee the right but not the obligation to purchase the leased used vehicle at the scheduled termination of the lease at a predetermined exercise price both of these options are simple examples of real options because the asset underlying these options is a used car that is a real asset however these options constitute a special case of real options since they are embedded in the lease contract which is a financial credit instrument theoretical analyses of lease contracts show that the cancellation option is quite valuable schallheim and mcconnell 1985 with respect to the purchase option hendel and lizzeri 2002 argue that they can play an important role in

subprime mortgage design abstract this paper offers evidence on the design of subprime mortgages as bridge financing products we show that the viability of subprime mortgages was uniquely predicated on the appreciation of house prices over short horizons high rates of early prepayments on subprime mortgages suggest the use of prepayments as an exit option this paper argues that high early defaults on post 2004 originations can be explained when one considers high early prepayment rates for pre 2004 originations

the value of risk measuring the service output of u s commercial banks rather than charging direct fees banks often charge implicitly for their services via interest spreads as a result much of bank output has to be estimated indirectly in contrast to current statistical practice dynamic optimizing models of banks argue that compensation for bearing systematic risk is not part of bank output we apply these models and find that between 1997 and 2007 in the u s national accounts on average bank output is overestimated by 21 percent and gdp is overestimated by 0 3 percent moreover compared with current methods our new estimates imply more plausible estimates of the share of capital in income and the return on fixed capital

an intertemporal general equilibrium model of asset prices this paper develops a continuous time general equilibrium model of a simple but complete economy and uses it to examine the behavior of asset prices in this model asset prices and their stochastic properties are determined endogenously one principal result is a partial differential equation which asset prices must satisfy the solution of this equation gives the equilibrium price of any asset in terms of the underlying real variables in the economy in this paper we develop a general equilibrium asset pricing model for use in applied research an important feature of the model is its integration of real and financial markets among other things the model endogenously determines the stochastic process followed by the equilibrium price of any financial asset and shows how this process depends on the underlying real variables the model is fully consistent with rational expectations and maximizing behavior on the part of all agents our framework is general enough to include many of the fundamental forces affecting asset markets yet it is tractable enough to be specialized easily to produce specific testable results furthermore the model can be extended in a number of straightforward ways consequently it is well suited to a wide variety of applications for example in a companion paper cox ingersoll and ross 7 we use the model to develop a theory of the term structure of interest rates many studies have been concerned with various aspects of asset pricing under uncertainty the most relevant to our work are the important papers on intertemporal asset pricing by merton 19 and lucas 16 working in a continuous time framework merton derives a relationship among the equilibrium expected rates of return on assets he shows that when investment opportunities are changing randomly over time this relationship will include effects which have no analogue in a static one period model lucas considers an economy with homogeneous individuals and a single consumption good which is produced by a number of processes the random output of these processes is exogenously determined and perishable assets are defined as claims to all or a part of the output of a process and the equilibrium determines the asset prices our theory draws on some elements of both of these papers like merton we formulate our model in continuous time and make full use of the analytical tractability that this affords the economic structure of our model is somewhat similar to that of lucas however we include both endogenous production and

nonconvexities retirement and the elasticity of labor supply abstract we consider two life cycle models of labor supply that use nonconvexities to generate retirement in each case we derive a link between hours worked prior to retirement the intertemporal elasticity of substitution for labor ies and the size of the nonconvexities this link is robust to allowing for credit constraints and human capital accumulation by younger workers and suggests values for the ies that are 75 or higher jel d91 j22 j24 j26

evidence on the insurance effect of bankruptcy exemptions abstract defaulting on one s debts when experiencing an adverse event can help insure households against unexpected income risks but the effect of allowing default on debt levels is ambiguous not least because lenders may restrict access to credit hence the optimal punishment for bankruptcy is unclear the us states allows householders to keep a variety of assets when filing for bankruptcy the bankruptcy exemptions and these exemptions change substantially between states and over time by exploiting these differences this study shows that raising the exemptions i marginally decreases the level of unsecured debt that household s hold ii makes consumption smoother thus despite the effect on debt levels the generous provisions to debtors in arrears may be helping us households to insure themselves against income risk

this is what happened to the oil price macroeconomy relationship abstract many of the quarterly oil price increases observed since 1985 are corrections to even bigger oil price decreases the previous quarter when one looks at the net increase in oil prices over the year recent data are consistent with the historical correlation between oil shocks and recessions

the principal principle i analyze optimal loan modification schemes in a stochastic home price and stochastic interest rate environment lenders maximize loan values by managing the borrower s option to default on the loan and prepayment option given negative equity controlling for the borrower s ability to pay rate reductions and maturity extensions result in a higher probability of redefault by homeowners even after modification of their loans in contrast loan write downs the principal principle not a favored recipe are value maximizing for the lender a shared appreciation mortgage enhances the ability to pay mitigates adverse selection and reduces the present value of expected deadweight foreclosure costs

consumption and labor supply with partial insurance an analytical framework we develop a model with partial insurance against idiosyncratic wage shocks to quantify risk sharing closed form solutions are obtained for equilibrium allocations and for moments of the joint distribution of consumption hours and wages we prove identification and demonstrate how labor supply data are informative about risk sharing the model estimated with us data over the period 1967 2006 implies that i 39 percent of permanent wage shocks pass through to consumption ii the share of wage risk insured increased until the early 1980s and iii preference heterogeneity is important in accounting for observed dispersion in consumption and hours jel e21 e23 e31 e52

the effects of health wealth and wages on labour supply and retirement behaviour this paper estimates a life cycle model of labour supply retirement and savings behaviour in which future health status and wages are uncertain individuals face a fixed cost of work and cannot borrow against future labour pension or social security income the method of simulated moments is used to match the life cycle profiles of labour force participation hours worked and assets that are estimated from the data to those that are generated by the model the model establishes that the tax structure of the social security system and pensions are key determinants of the high observed job exit rates at ages 62 and 65 removing the tax wedge embedded in the social security earnings test for individuals aged 65 and older would delay job exit by almost one year by contrast social security benefit levels health and borrowing constraints are less important determinants of job exit at older ages for example reducing social security benefits by 20 would cause workers to delay exit from the labour force by only three months

investment under uncertainty the case of replacement investment decisions we analyze the determinants of replacement investment decisions in a contingent claims model with maintenance and operation cost uncertainty we find that the optimal time between replacements is increasing in the volatility of cost the purchase price of a new asset and the corporate tax rate and is decreasing in the systematic risk of cost the salvage value of the asset and the investment tax credit the optimal time between replacements can either increase or decrease with an increase in the depreciation rate extensions of the model to examine the effects of technological and tax policy uncertainty on replacement investment decisions give intuitive but striking results uncertainty about the arrival of a technological innovation that would decrease maintenance and operation cost results in a significant decrease in replacement investment uncertainty in a tax law change that would encourage investment decreases current investment and uncertainty in a tax law change that would discourage investment increases current investment

negative equity and foreclosure theory and evidence abstract recent declines in housing prices have focused attention on the relationship between negative housing equity and mortgage default theory implies that negative equity is a necessary condition for default but not a sufficient one this often misunderstood result is clearly illustrated in a dataset of massachusetts homeowners during the early 1990s fewer than 10 percent of borrowers likely to have had negative equity at the end of 1991 experienced a foreclosure during the following three years an econometric model of default estimated on two decades of massachusetts housing data also predicts low default rates for current negative equity borrowers we develop a simple theoretical model to interpret these empirical findings and to assess potential foreclosure reduction policies our results imply that lenders and policymakers face an information problem in trying to help borrowers with negative equity because it is hard to determine which owners really need help in order to stay in their homes

deleveraging and mortgage curtailment abstract using monthly loan level data individual partial prepayments curtailments from january 2001 to june 2011 are observed for mortgages in twenty metropolitan statistical areas contrary to some earlier assertions american homeowners now frequently commit funds towards their mortgage payments in excess of the amount due over 30 of loans outstanding have made at least one curtailment payment after controlling for borrower and loan level variables we show that the latent propensity to curtail has steadily risen from 2003 to 2006 and remains at elevated levels therefore curtailment provides an example of consumer deleveraging behavior that began prior to the great recession

a dynamic model of welfare reform a dynamic structural model of labor supply welfare participation and food stamp participation is estimated using the 1992 1993 and 1996 panels of the survey of income and program participation details of various policies including welfare time limits work requirements and earned income tax credit eitc are incorporated formally in the budget constraint policy simulations reveal that the economy accounts for half of the increase in the labor supply of female heads of family between 1992 and 1999 a time limit results in a larger efficiency gain than a work requirement or a direct reduction in welfare benefits a reform package can lead to both a reduction in the government expenditure and an improvement in utility the eitc expansion results in a substantial efficiency gain among individuals with the lowest expected wage these individuals are almost unaffected by the economic expansion but their income and utility increase significantly under the reform package

macro economy stock market and oil prices do meaningful relationships exist among their cyclical fluctuations this paper examines the relationship among consumer price index industrial production stock market and oil prices in greece initially we use a unified statistical framework cointegration and vecm to study the data in levels we then employ a multivariate var model to examine the relationship among the cyclical components of our series the period of the study is from 1996 1 to 2008 6 findings suggest that oil prices and the stock market exercise a positive effect on the greek cpi in the long run cyclical components analysis suggests that oil prices exercise significant negative influence to the stock market in addition oil prices are negatively influencing cpi at a significant level however we find no effect of oil prices on industrial production and cpi finally no relationship can be documented between the industrial production and stock market for the greek market the findings of this study are of particular interest and importance to policy makers financial managers financial analysts and investors dealing with the greek economy and the greek stock market

default probabilities for mortgages abstract models now exist for valuing the default option embedded in a mortgage implicitly these models generate all the information necessary to determine the probability of default in any possible situation economists and policymakers may find such default probabilities considerably more interesting than the nonobservable dollar value of the default option this paper provides the analytical procedure necessary to calculate such probabilities and presents a wide range of results the decision to terminate a mortgage results in the loss of the options to default or prepay in the future because of this consideration the price of a house must fall below the point of zero equity before a rational borrower defaults we provide evidence that even in the absence of transaction costs this value of delay results in substantial levels of negative equity being observed without default occurring in fact by not accounting for the value of delay most of the current empirical literature cited in this article substantially overestimates the role of transaction costs in the decision to default

the double trigger for mortgage default evidence from the fracking boom this paper exploits a natural experiment afforded by the fracking boom in pennsylvania to shed light on the determinants of mortgage default looking only at mortgages originated before fracking be

consumer ruthlessness and mortgage default during the 2007 to 2009 housing bust from 2007 to 2009 u s house prices plunged and mortgage defaults surged while ostensibly consistent with widespread ruthless default analysis of detailed mortgage and house price data indicates that borrowers do not walk away until they are deeply underwater far deeper than traditional models predict the evidence suggests that lender recourse is not the major driver of this result we argue that emotional and behavioral factors play an important role in decisions to continue paying borrower reluctance to walk away implies that the moral hazard cost of default as a form of social insurance may be lower than suspected this article is protected by copyright all rights reserved

paradoxical effects of increasing the normal retirement age a prospective evaluation abstract a life cycle model that incorporates both disability insurance di and old age insurance oai is developed to study social security reforms and is compared to an alternative model without di the model with di predicts that increasing the normal retirement age nra causes a decrease in employment and an increase in di receipt and that the decrease of payroll tax revenue and the increase of di expenses combined offset about 40 of the decrease of oai expenses these paradoxical effects of increasing the nra are absent from the model without di i employ both models to search for reforms that will balance the government budget in an economy with an aging population which has the demographics for the year 2100 and find that the required change in tax and benefit rules differ substantially across the two models

rational prepayment and the valuation of mortgage backed securities this article presents a new model of mortgage prepayments based on rational decisions by mortgage holders these mortgage bolders face beterogeneous transaction costs which are explicitly modeled the model is estimated using a version of hansen s 1982 generalized method of moments and is sbown to capture many of the empirical features of mortgage prepayment estimation results indicate that mortgage holders act as tbougb tbey face transaction costs tbat far exceed tbe explicit costs usually incurred on refinancing they also wait an average of more than a year before refinancing even when it is optimal to do so the model fits observed prepayment behavior as well as thee recent empirical model of schwartz and torous 1989 implications for pricing mortgage backed securities are discussed

what has been learned about labor supply in the past twenty years the main advance in the study of labor supply in the past 20 years has come in recognizing and interpreting the variety of different labor supply functions that coexist in the empirical literature a crucial theoretical distinction with important empirical payoff is that between labor supply choices at the extensive margin i e labor force participation and employment choices and choices at the intensive margin i e choices about hours of work or weeks of work for workers another important distinction is the one between a descriptive labor supply function and a structural supply function that can be the basis for out of sample policy investigations concerning responses to tax and welfare programs and evaluations of welfare losses a full understanding of the participation hours dichotomy leads to an appreciation of the importance of the problem of selection bias what is the wage to impute to a nonworking person these distinctions are a legacy of the research conducted on labor supply over the past 20 years many important empirical questions have been addressed i how strong are the effects of taxes welfare and transfer programs on labor supply ii how important is intertemporal substitution can life cycle labor supply models explain business cycle labor supply behavior iii has the consensus view of the 1960 s of high labor supply elasticities for married women and low labor supply elasticities for married men held up all of the empirical evidence assembled on labor supply must be called into question in the light of important research on the basic quality of the data conducted by analysts at the university of michigan i discuss this evidence in a concluding section except for my discussion of measurement issues i focus only on the major discoveries about which a general consensus has emerged

a generalized valuation model for fixed rate residential mortgages this paper uses option pricing techniques to rationally price mortgage instruments subject to both default and prepayment risk attention is given to terminations due to purely financial consideration of the mortgage contract itself as well as to personally induced terminations explicit inclusion of default in the mortgage valuation procedure also permits the valuation of insurance against such default qualitatively it is found that default differs significantly in the behavior from either prepayment or nonfinancial termination quantitatively however there is significant substitution between prepayment and default so that the addition of a default feature to the contract has only a modest impact on mortgage values unless there is substantial price volatility in the housing market or a high loan to value ratio copyright 1992 by ohio state university press

mortgage terminations heterogeneity and the exercise of mortgage options as applied to the behavior of homeowners with mortgages option theoiy predicts that mortgage prepayment or default will be exercised if the call or put option is in the money by some specific amount our analysis tests the extent to which the option approach can explain default and prepayment behavior evaluates the practical importance of modeling both options simultaneouisly and models the unobserved heterogeneity of borrowers in the home mortgage market the paper presents a uinified model of the competing risks of mortgage termination by prepayment and default considering the two hazards as dependent competing risks that are estimated jointly it also accounts for the unobserved heterogeneity among borrowers and estimates the unobserved heterogeneity simultaneously with the parameters and baseline hazards associated with prepayment and default functions our results show that the option model in its most straightfolward version does a good job of explaininig default and prepayment but it is not enouigh by itself the simultaneity of the options is very important empirically in explaining behavior the results also show that there exists significant heterogeneity among mortgage borrowers ignoring this heterogeneity results in serious errors in estimating the prepayment behavior of homeowners

oil prices and news based uncertainty novel evidence abstract in this paper using news implied volatility nvix as a key variable to measure news based uncertainty we investigate whether the world price of oil and three classical oil shocks affect news based uncertainty or vice versa our analysis is conducted through the news mechanism that is unrelated to fundamentals this research contributes to the literature on the effect of oil prices on news based uncertainty by studying the dynamics in both the time and frequency domains using the wavelet coherence analysis our results illustrate that oil prices exhibit a statistically and economically significant leading role on nvix especially in the long run further we distinguish the different impacts of oil shocks and find that the oil supply and aggregate demand shocks usually play a leading role on relatively long term nvix while the oil specific demand shocks are sensitive to the fluctuations of nvix we also find that the rules of comovement between oil prices oil shocks and news based uncertainty change at different frequencies and times they usually move together in opposite directions with the exception of the oil supply shocks and nvix these findings apply to both oil spot and futures markets our results present new and interesting implications for investors and policy makers by supporting the news reallocation channel as an important transmission mechanism from oil markets

an economic model of welfare stigma perhaps the most basic assumption of the economic theory of consumer demand is that more is better than less virtually all of the major propositions of consumer theory can in a certain sense be derived from the assumption that goods are good interestingly however this tenet seems to be violated by the behavior of many individuals in the low income population for many turn out to be eligible for a positive welfare benefit but do not in fact join the welfare rolls for example it has been estimated that in 1970 only about 69 percent of the families eligible for afdc aid to families with dependent children participated in the program see richard michel 1980 the corresponding percentage for afdc u the program for which families with an unemployed male are eligible was only 43 percent and the participation rate in the food stamp program was only 38 percent see maurice mcdonald 1977 this phenomenon has puzzled many investigators because such individuals do not locate on the boundaries of their budget sets consequently most investigators ignore the problem when studying the effects of welfare programs on behavior in this paper this seemingly irrational rejection of an increase in income is modeled as resulting from welfare stigma that is from disutility arising from participation in a welfare program per se 1 the existence of stigma has been amply documented in the sociological literature patrick horan and patricia austin 1974 lee rainwater 1979 where interviews of recipients have often uncovered feelings of lack of self respect and negative self characterizations from participation in welfare nevertheless this phenomenon has not been modeled and many questions consequently remain when is the disutility of participation strong enough to prevent participation shouldn t we expect individuals to weigh the disutility of participation against the potential benefit in their decisions what is the elasticity of participation with respect to the potential benefit also in a slightly different vein how are the work disincentives of welfare affected by stigma these questions have been given scant attention by economists yet they are crucial for our ability to predict the impact of various welfare programs on the lowincome population here these questions are addressed by modeling nonparticipation as a utility maximizing decision the model is developed and estimated for the afdc program 2 the model posits an individual utility function containing not just disposable income but

a life cycle model of health and retirement the case of swedish pension reform abstract sweden is one of the few western economies to have undertaken a large pension reform in recent years this was done with great expectations but little formal analysis in this paper we develop a life cycle labor supply model to quantify the predicted labor supply implications of this reform in our framework individuals choose when to stop working and given eligibility criteria when if to apply for disability and pension benefits agents are heterogeneous in skills and receive exogenous shocks to health throughout their life we find that the new pension system creates large incentives for the continued employment of older workers this is promising news for countries grappling with pension reform and indicates that there are significant lessons to be learned from the swedish case

rational prepayments and the valuation of collateralized mortgage obligations absteract this article presents a procedure for evaluating collateralized mortgage obligation cmo tranches the solution procedure is in the spirit of a dynamic programming problem in which an individual mortgagor s decision to prepay is the feedback control variable the mortgagor seeks to minimize the value of the mortgage subject to refinancing costs we employ a two step procedure to solve this dynamic programming problem the first step uses an implicit finite difference backward solution procedure to determine the optimal prepayment boundary for a class of mortgagors each of whom confronts the same proportional refinancing cost this step is repeated for several different classes of mortgagors that differ in the level of refinancing costs that they confront the outcome of this first step is a series of prepayment boundaries one set of boundaries for each level of refinancing costs i e one set of boundaries for each refinancing cost category of mortgagors in the second step the prepayment boundaries determined in the first step are used in conjunction with monte carlo simulation to value the cmo tranches the essence of the second step is that when the simulated interest rate hits the boundary for a particular class it triggers a prepayment scenario for that class of mortgagors we conduct extensive sensitivity analysis to determine the robustness of this approach and our solution procedure to alternative single factor models of the term structure of interest rates and to alternative specifications of the distribution of refinancing cost levels confronted by mortgagors the sensitivity analysis indicates that cmo tranche valuation is not particularly sensitive to alternative models of the term structure so long as the models are consistent with the current yield curve but even when alternative specifications of the refinancing cost categories generate nearly identical values for the collateral underlying the cmo i e the generic mortgage backed securities the resulting tranche values can differ widely between the two specifications the results point out the importance of accurate estimation of the distribution of refinancing costs when the rational valuation model is used for the analysis of cmo tranches

modelling and forecasting mortgage delinquency and foreclosure in the uk in the absence of micro data in the public domain new aggregate models for the uk s mortgage repossessions and arrears are estimated using quarterly data over 1983 2014 motivated by a conceptual double trigger frame framework for foreclosures and payment delinquencies an innovation to improve on the flawed but widespread use of loan to value measures is to estimate difficult to observe variations in loan quality and access to refinancing and shifts in lenders forbearance policy by common latent variables in a system of equations for arrears and repossessions we introduce for the first time in the literature a theory justified estimate of the proportion of mortgages in negative equity as a key driver of aggregate repossessions and arrears this is based on an average debt equity ratio corrected for regional deviations and uses a functional form for the distribution of the debt equity ratio checked on irish micro data from the bank of ireland and bank of england snapshots of negative equity we systematically address serious measurement bias in the months in arrears measures neglected in previous uk studies highly significant effects on aggregate rates of repossessions and arrears are found for the aggregate debt service ratio the proportion of mortgages in negative equity and the unemployment rate economic forecast scenarios to 2020 highlight risks faced by the uk and its mortgage lenders illustrating the usefulness of the approach for bank stress testing for macroeconomics our model traces an important part of the financial accelerator the feedback from the housing market to bad loans and hence banks ability to extend credit

uncertainty and crude oil returns we use a copula approach to investigate the effect of uncertainty on crude oil returns using copulas to construct multivariate distributions of time series data permit the calculation of the dependence structure between the series independently of the marginal distributions further we implement the copula estimation using a rolling window method to allow for a time varying effect of equity and economic policy uncertainty on oil returns the results show that higher uncertainty as measured by equity and economic policy uncertainty indices significantly increase crude oil returns only during certain periods of time that is we find a positive dependence prior to the financial crisis and great recession interestingly estimation of the copula over the entire sample period leads to a negative dependence between the equity and economic policy indices and the crude oil return

macroeconomic driven prepayment risk and the valuation of mortgage backed securities we develop a three factor no arbitrage model for valuing mortgage backed securities in which we solve for the implied prepayment function from the cross section of market prices this model closely fits the cross section of mortgage backed security prices without needing to specify an econometric prepayment model we find that implied prepayments are generally higher than actual prepayments providing direct evidence of significant macroeconomic driven prepayment risk premiums in mortgage backed security prices we also find evidence that mortgage backed security prices were significantly affected by fannie mae credit risk and the federal reserve s quantitative easing programs received may 10 2016 editorial decision september 22 2017 by editor stijn van nieuwerburgh

continuous workout mortgages efficient pricing and systemic implications abstract this paper studies the continuous workout mortgage cwm a two in one product a fixed rate home loan coupled with negative equity insurance to advocate its viability in mitigating financial fragility in order to tackle the many issues that cwms embrace we perform a range of tasks we optimally price cwms and take a systemic market based approach stipulating that mortgage values and payments should be linked to housing prices and adjusted downward to prevent negative equity we illustrate that amortizing cwms can be the efficient home financing choice for many households we price cwms as american option style defaulting debt in conjunction with prepayment within a continuous time analytic framework we introduce random prepayments via the intensity approach of jarrow and turnbull 1995 we also model the optimal embedded option to default whose exercise is motivated by decreasing random house prices we adapt the barone adesi and whaley 1987 baw approach to work within amortizing mortgage context we derive new closed form and new analytical approximation methodologies which apply both for pricing cwms as well as for pricing the standard us 30 year fixed rate mortgage frm

risk based capital requirements for mortgage loans abstract we contribute to the debate over the reform of the basel accord by developing risk based capital requirements for mortgage loans held in portfolio by financial intermediaries our approach employs simulation of both economic variables that affect default incidence and conditional loss probability distributions results indicate that appropriate capital charges for credit risk vary substantially with loan characteristics and portfolio geographic diversification hence rules that offer little risk differentiation including the current basel i regime and standardized approach proposed in basel ii result in significant divergence between regulatory and economic capital these results highlight the incentive problems inherent in simplified methods of capital regulation

commercial loan borrower s optimal borrowing and prepayment decisions under uncertainty we model a firm which faces continuing stochastic money needs and fluctuating interest rates the borrower minimizes the expected present value of the sum of interest payments and prepayment penalty costs subject to a liquidity constraint since contingent opportunities are absent from the model we find i the firm should not inventory cash ii the firm should prepay the maximum amount possible if it prepays at all

oil price shocks policy uncertainty and stock returns of oil and gas corporations abstract this paper investigates the effects of oil price shocks and economic policy uncertainty on the stock returns of oil and gas companies we find that an oil demand side shock has a positive effect on the return of oil and gas companies on average whereas shocks to policy uncertainty have a negative effect on the return historical decomposition shows that the effects of oil shocks on the stock return are amplified by the endogenous policy uncertainty responses these results are consistent with those for major integrated oil and gas companies the return responses however show heterogeneous effects of structural shocks on upstream midstream and downstream oil and gas companies suggesting that a well diversified portfolio is obtainable

house prices bank instability and economic growth evidence from the threshold model abstract this paper examines the effects of house prices on bank instability when gauged at various levels of income growth bank stability may respond differently to house price changes or deviations from fundamental values in an economic boom environment than in a bust circumstance a threshold estimation technique developed by hansen 1999 is applied to a panel of 286 u s metropolitan statistical areas msas over the period 1990q1 2010q4 we consider two house price indicators the house price changes and the house price deviations from long run equilibrium the results suggest the existence of income growth threshold effects in the relationship between house prices and bank instability specifically there are two income growth thresholds when using the house price changes and one income growth threshold when the house price deviations are applied robustness results using the non msas sample from 1995q1 to 2010q4 provide further evidence of income growth threshold effects

a labor supply elasticity accord a dispute about the size of the aggregate labor supply elasticity has been fortified by a contentious aggregation theory used by real business cycle theorists the replacement of that aggregation theory with one more congenial to microeconomic observations opens possibilities for an accord about the aggregate labor supply elasticity the new aggregation theory drops features to which empirical microeconomists objected and replaces them with life cycle choices whether the new aggregation theory ultimately indicates a small or large macro labor supply elasticity will depend on how shocks and government institutions interact to put workers at interior solutions for career length

the influence of foreclosure delays on borrowers default behavior this paper conducts loan level analysis to investigate the influence of expected foreclosure delay on a borrower s default propensity we include the actual foreclosure times in the analysis to capture the dynamic nature of foreclosure duration consistent with theoretical predictions we find a statistically and economically significant impact of foreclosure delay on borrower default behavior in the current market condition where many borrowers have negative equity the increase in delay may make default an optimal choice for more borrowers the negative effect of increased foreclosure delay may need to be considered when devising policies to aid troubled borrowers

earnings disposable income and consumption of allowed and rejected disability insurance applicants ticipation rate has increased from less than 1 percent to over 5 percent of the adult population in many european countries the increases are even more striking from 1 percent to 7 percent in the united kingdom and from 2 percent to almost 10 percent in norway two key questions in thinking about the size and growth of the di program are to what extent it discourages work and how valuable the insur ance is to individuals and families these questions motivate our paper we begin by describing the earnings disposable income and consumption of awarded and rejected di applicants before and after the disability onset and the allowance decision next we discuss alternative interpretations of these descriptive results either through the lens of the approach taken in bound

are micro and macro labor supply elasticities consistent a review of evidence on the intensive and extensive margins we evaluate whether state of the art macro models featuring indivisible labor are consistent with modern quasi experimental micro evidence by synthesizing evidence on both the intensive and extensive margins we find that micro estimates are consistent with macro estimates of the steady state hicksian elasticities relevant for cross country comparisons on both the extensive and intensive margins however micro estimates of intertemporal substitution frisch elasticities are an order of magnitude smaller than the values needed to explain business cycle fluctuations in aggregate hours by preferences the key puzzle to be resolved is why micro and macro estimates of the frisch extensive margin elasticity are so different

default and prepayment modelling in participating mortgages abstract since the 2008 financial crisis the mortgage market has been renovating its tools and instruments in order to avoid a new crisis one such innovative instrument is the participating mortgage in which the lender gains part of the net operating income and or future appreciation in this paper we establish a financing model for participating mortgages incorporating early termination options such as default and two prepayment clauses defeasance and prepayment penalty later we illustrate a detailed sensitivity analysis of the model the values of early termination options depend on the choice of parameters in the model as well as the term structure of short term rates finally we show that a participation rate of 11 24 results in zero mortgage interest rate using the parameters in our simulation

mortgage default during the u s mortgage crisis this paper asks which theories of mortgage default are quantitatively consistent with observations in the united states during 2002 2010 theoretical models are simulated for the observed time series of aggregate house prices their predictions are then compared to actual default rates on prime fixed rate mortgages an out of sample test discriminates between estimated reduced forms of the two most prominent theories the test reveals that the doubletrigger hypothesis attributing mortgage default to the joint occurrence of negative equity and a life event like unemployment outperforms a frictionless option theoretic default model based on this finding a structural partialequilibrium model with liquidity constraints and idiosyncratic unemployment shocks is presented to provide micro foundations for the double trigger hypothesis in this model borrowers with negative equity are more likely to default when they are unemployed and have low liquid wealth the model explains most of the observed strong rise in mortgage default rates a policy implication of the model is that subsidizing homeowners can mitigate a mortgage crisis at a lower cost than bailing out lenders

valuing commercial mortgages an empirical investigation of the contingent claims approach to pricing risky debt this paper empirically investigates a contingent claims model of commercial mortgage pricing we find that the magnitude of the observed default premia for a sample of nonprepayable fixed rate bullet mortgages can be explained by the contingent claims model in addition the model explains a significant proportion of the period to period changes in the default premia however given an assumed negative correlation between building value changes and interest rate changes the model s risk structure tends to increase less steeply with increasing maturity than the observed risk structure since the seminal work of black and scholes 1973 corporate liabilities have been modeled as options on the total value of the firm this contingent claims approach to bond pricing was refined by merton 1974 to allow for cash dispersals prior to the bonds maturities and by brennan and schwartz 1980 and ingersoll 1987 to allow for interest rate uncertainty although variants of these bond pricing models are currently being used extensively on wall street they have not been tested extensively moreover empirical studies have not successfully accounted for the observed spread between the rates on risky and default free debt jones mason and rosenfeld 1984 empirically investigate a model that assumes a nonstochastic term structure of interest rates while ramaswamy and sundaresan 1986 examine a model with stochastic interest rates to price floating rate notes in both cases the models could not explain the observed default premia the relative lack of empirical analysis is due partly to the complicated nature of corporate bonds major corporations generally have a large number of different bond issues outstanding that have different priorities in the event that the firm goes bankrupt moreover the bonds can have a variety of covenants specifying sinking fund provisions conditions under which technical default will occur and other restrictions that can have an impact on their value although these complications do not preclude pricing various bond issues on a case by case basis they make it difficult to test systematically the accuracy of the pricing model

what motivates a subprime borrower to default this paper uses a real options approach to analyse the exercise of the default option embedded in mortgages in particular it examines a subprime household who borrows at a premium but hopes to refinance at prime rates if their house appreciates we show how these optimal default decisions can be used to calculate probabilities of default an important input for risk management and pricing purposes numerical examples are provided calibrated to us data in a low interest rate environment the credit upgrade potential may discourage subprime borrowers from defaulting however default probabilities are highly sensitive to changes in interest rates and house prices this provides a rational explanation for the prevalence of adjustable rate mortgages among subprime borrowers and the subsequent large numbers of defaults when interest rates rose and house prices declined

disability benefits consumption insurance and household labor supply while a mature literature finds that disability insurance di receipt discourages work the welfare implications of these findings depend on two rarely studied economic quantities the full cost of di allowances to taxpayers summing over di transfer payments benefit substitution to or from other transfer programs and induced changes in tax receipts and the value that individuals and families place on receiving benefits in the event of disability we comprehensively assess these missing margins in the context of norway s di system drawing on two strengths of the norwegian environment first norwegian register data allow us to characterize the household impacts and fiscal costs of disability receipt by linking employment taxation benefits receipt and assets at the person and household level second random assignment of di applicants to norwegian judges who differ systematically in their leniency allows us to recover the causal effects of di allowance on individuals at the margin of program entry accounting for the total effect of di allowances on both household labor supply and net payments across all public transfer programs substantially alters our picture of the consumption benefits and fiscal costs of disability receipt while di allowance causes a significant increase in household income and consumption on average it has little impact on income or consumption of married applicants because spousal earnings responses via the added worker effect and benefit substitution entirely offset di benefit payments among those who are allowed relative to those who are denied to develop the welfare implications of these findings we estimate a dynamic model of household behavior that translates employment reapplication and savings decisions into revealed preferences for leisure and consumption we find that household valuation of receipt of di benefits is considerably greater for single and unmarried individuals than for married couples because spousal labor supply substantially buffers household income and consumption in the event of di denial

option theory and floating rate securities with a comparison of adjustable and fixed rate mortgages this article demonstrates how to value floating rate securities in particular adjustable rate mortgages in the presence of default the problem is not a straightforward one since endogenous termination default and prepayment necessitates solution by backward procedures but caps on the floating rate then create path dependencies the solution is to introduce an artificial state variable the past contract rate in addition to the natural stochastic variables the interest and the house price process with this technique a numerical investigation of the properties of defaultable adjustable rate mortgages is provided in all cases a comparison is made with standard fixed rate mortgages coauthors are donald c keenan walter j muller iii and james f epperson copyright 1993 by university of chicago press

should i default on my mortgage even if i can pay experimental evidence abstract we study strategic default in the laboratory i e in a controlled experiment subjects are initially endowed with a house and a mortgage we use neutral wording in the experiment and must decide at each period in which their mortgage is alive among three options making the mortgage payment selling the house or walking away from their house and defaulting on their mortgage at each point in time we can observe whether defaulters can afford to make the mortgage payment and thus directly compute the number of strategic defaulters subjects default in the right periods and quite fast learn what they should consume we find experimental support for the double trigger hypothesis individuals faced with low income and low house prices are more likely to default we observe that subjects default less than optimal and this decision is significantly affected by social norm concerns in the context of the experiment individuals under consume in the first periods of life they are cautious when indebted both introducing a 50 probability of recourse and a responsible homeowner reward are very effective in preventing default in the lab especially by individuals receiving a bad shock to income when house prices are low

subprime mortgage default abstract this paper constructs a reduced form credit risk model of mortgage default the data used is of privately securitized subprime arms adjustable rate mortgages originated between 1997 and 2008 and observed between 2000 and 2009 the period studied thus encompasses the beginning of the subprime crisis given the estimated model contractual properties of the loans are then used to infer the market price of default risk for the various quarters of origination it is empirically determined that a change in the inherent nature of borrowers led to a deterioration in their default performance a change which can be first detected in late 2004 on the other hand the evidence also indicates that the secondary mortgage market became aware of this change at about this same time the large rise in defaults in 2007 cannot therefore be attributed to any surprise other than the unexpectedly large fall in housing prices

co movements and spillovers of oil and renewable firms under extreme conditions new evidence from negative wti prices during covid 19 we test for the existence of volatility spillovers and co movements among energy focused corporations during the outbreak of the covid 19 pandemic inclusive of the april 2020 events where west texas intermediate wti oil future prices became negative employing the spillover index approach of diebold and yilmaz 2012 as well as developing a dcc figarch conditional correlation framework and using estimated spillover indices built on a generalised vector autoregressive framework in which forecast error variance decompositions are invariant to the variable ordering we examine the sectoral transmission mechanisms of volatility shocks and contagion throughout the energy sector among several results we find positive and economically meaningful spillovers from falling oil prices to both renewable energy and coal markets however this result is only found for the narrow portion of our sample surrounding the negative wti event we interpret our results being directly attributed to a sharp drop in global oil gas and coal demand rather than because of a sudden increase in oil supply while investors observed the us fracking industry losing market share to coal they also viewed renewables as more reliable mechanism to generate long term stable and low cost supply

reducing the impact of real estate foreclosures with amortizing participation mortgages we employ amortizing participation mortgage apm to offer a novel ex post renegotiation method of a foreclosure apm belongs to the family of home loan credit facilities advocated in the dodd frank wall street reform and consumer protection act 2010 in our framework apms reduce the endemic agency costs of debt by improving affordability these benefits increase the demand for real estate in bust times and reduce fragility of the financial system thereby preventing foreclosures we evaluate apms in a stochastic control framework and provide solutions for an optimal amortization schedule we generalize our approach to partially amortizing and commercial mortgages which encompass balloon payments finally we provide concrete numerical examples of home loan modifications we also offer detailed sensitivity analysis to market parameters such as house price volatility and interest rates

what triggers mortgage default this paper assesses the relative importance of two key drivers of mortgage default negative equity and illiquidity to do so the authors combine loan level mortgage data with detailed credit bureau information about the borrower s broader balance sheet this gives them a direct way to measure illiquid borrowers those with high credit card utilization rates the authors find that both negative equity and illiquidity are significantly associated with mortgage default with comparably sized marginal effects moreover these two factors interact with each other the effect of illiquidity on default generally increases with high combined loan to value ratios cltv though it is significant even for low cltv county level unemployment shocks are also associated with higher default risk though less so than high utilization and strongly interact with cltv in addition having a second mortgage implies significantly higher default risk particularly for borrowers who have a first mortgage ltv approaching 100 percent this abstract was borrowed from another version of this item

mortgage default and possession under recourse a competing hazards approach recent studies by ambrose buttimer and capone have stressed the fact that lender and borrower decisions after the initial default on amortgage may significantly affect the amount and timing of recoveries and hence more broadly the value and riskiness of mortgage loan portfolios this study uses microeconomic data from the uk to examine the timing decisions of mortgage lenders and borrowers when mortgages are in default the results suggest that salary and interest rates influence timing decisions more than loan to value ratios do and that lenders and borrowers accelerate the resolution of delinquent mortgages as the economic climate deteriorates