Rights statement: The final, definitive version of this article has been published in the Journal, Journal of Economic Behavior and Organization 85, 2013, © ELSEVIER.
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Research output: Contribution to Journal/Magazine › Journal article › peer-review
Research output: Contribution to Journal/Magazine › Journal article › peer-review
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TY - JOUR
T1 - Mitigating financial fragility with Continuous Workout Mortgages
AU - Shiller, Robert J.
AU - Wojakowski, Rafal
AU - Ebrahim, Shahid
AU - Shackleton, Mark
N1 - The final, definitive version of this article has been published in the Journal, Journal of Economic Behavior and Organization 85, 2013, © ELSEVIER.
PY - 2013/1
Y1 - 2013/1
N2 - This paper models Continuous Workout Mortgages (CWMs) in an economic environment with refinancings and prepayments. CWMs are home loans whose balance and payments are indexed using a market-observable house price index of the pertaining locality. Our main results include: (a) explicit modelling of repayment and interest-only CWMs; (b) closed form formulæ for mortgage payment and mortgage balance of a repayment CWM; (c) a closed form formula for the actuarially fair mortgage rate of an interest-only CWM. For repayment CWMs we extend our analysis to include two negotiable parameters: adjustable "workout proportion" and adjustable "workout threshold." These results are of importance as they not only help in the understanding of the mechanics of CWMs and estimating key contract parameters, but they also provide insight on how to enhance the resilience of the financial architecture and mitigate systemic risk.
AB - This paper models Continuous Workout Mortgages (CWMs) in an economic environment with refinancings and prepayments. CWMs are home loans whose balance and payments are indexed using a market-observable house price index of the pertaining locality. Our main results include: (a) explicit modelling of repayment and interest-only CWMs; (b) closed form formulæ for mortgage payment and mortgage balance of a repayment CWM; (c) a closed form formula for the actuarially fair mortgage rate of an interest-only CWM. For repayment CWMs we extend our analysis to include two negotiable parameters: adjustable "workout proportion" and adjustable "workout threshold." These results are of importance as they not only help in the understanding of the mechanics of CWMs and estimating key contract parameters, but they also provide insight on how to enhance the resilience of the financial architecture and mitigate systemic risk.
KW - Continuous Workout Mortgage (CWM)
KW - Repayment
KW - House price index
KW - Prepayment intensity
KW - Cap and floor on continuous flow
U2 - 10.1016/j.jebo.2012.04.010
DO - 10.1016/j.jebo.2012.04.010
M3 - Journal article
VL - 85
SP - 269
EP - 285
JO - Journal of Economic Behavior and Organization
JF - Journal of Economic Behavior and Organization
SN - 0167-2681
ER -