Epidemiological spreading of mortgage default

Author:

Schweikert Jochen,Höchstötter Markus

Abstract

Purpose This paper aims to introduce mathematical models to capture the spreading of epidemics to explain the expansion of mortgage default events in the USA. Design/methodology/approach The authors use the state of infectiousness and death to represent the subsequent steps of payment elinquency and default, respectively. As the local economic structure influences regional unemployment, which is a strong driver of mortgage default, the authors model interdependencies of regional mortgage default rates through employment conditions and vicinity. Findings Based on a large sample between 2000 and 2014 of loan-level data, the estimation of key parameters of the model is proposed. The model’s forecast accuracy shows an above-average performance compared to well-known approaches such as linear regression or logit models. Originality/value The key findings may be useful in understanding the dynamics of mortgage defaults and its spatial spreading.

Publisher

Emerald

Subject

General Economics, Econometrics and Finance

Reference46 articles.

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2. Bajari, P., Chu, C., Nekipelov, D. and Park, M. (2013), “A dynamic model of subprime mortgage default: estimation and policy implications”, Working Paper, National Bureau of Economic Research.

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