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Planning Your Own Debt
Author(s) -
Nielsen Søren,
Poulsen Rolf
Publication year - 2002
Publication title -
european financial management
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.311
H-Index - 64
eISSN - 1468-036X
pISSN - 1354-7798
DOI - 10.1111/1468-036x.00184
Subject(s) - debt , rule of thumb , interest rate , value (mathematics) , floating interest rate , actuarial science , economics , econometrics , business , computer science , monetary economics , finance , algorithm , machine learning
We model the Danish market for mortgage backed securities with a two‐factor interest rate model and use a stochastic programming approach to analyse how an individual home‐owner should initially compose and subsequently readjust his mortgage in an optimal way. Results show that the ‘rules of thumb’ used by financial institutions are reasonable, although best suited for more aggressive mortgagors, for whom the delivery option is of some value. More risk‐averse investors should also re‐adjust frequently, but use more diversified portfolios. Results are insensitive to whether a one‐ or two‐factor model is used, provided the former is suitably calibrated.