Artikel

Portfolio optimization and mortgage choice

This paper studies the optimal mortgage choice of an investor in a simple bond market with a stochastic interest rate and access to term life insurance. The study is based on advances in stochastic control theory, which provides analytical solutions to portfolio problems with a stochastic interest rate. We derive the optimal portfolio of a mortgagor in a simple framework and formulate stylized versions of mortgage products offered in the market today. This allows us to analyze the optimal investment strategy in terms of optimal mortgage choice. We conclude that certain extreme investors optimally choose either a traditional fixed rate mortgage or an adjustable rate mortgage, while investors with moderate risk aversion and income prefer a mix of the two. By matching specific investor characteristics to existing mortgage products, our study provides a better understanding of the complex and yet restricted mortgage choice faced by many household investors. In addition, the simple analytical framework enables a detailed analysis of how changes to market, income and preference parameters affect the optimal mortgage choice.

Sprache
Englisch

Erschienen in
Journal: Journal of Risk and Financial Management ; ISSN: 1911-8074 ; Volume: 10 ; Year: 2017 ; Issue: 1 ; Pages: 1-23 ; Basel: MDPI

Klassifikation
Management
Thema
optimal mortgage choice
stochastic control theory
stochastic interest rate

Ereignis
Geistige Schöpfung
(wer)
Nordfang, Maj-Britt
Steffensen, Mogens
Ereignis
Veröffentlichung
(wer)
MDPI
(wo)
Basel
(wann)
2017

DOI
doi:10.3390/jrfm10010001
Handle
Letzte Aktualisierung
10.03.2025, 11:45 MEZ

Datenpartner

Dieses Objekt wird bereitgestellt von:
ZBW - Deutsche Zentralbibliothek für Wirtschaftswissenschaften - Leibniz-Informationszentrum Wirtschaft. Bei Fragen zum Objekt wenden Sie sich bitte an den Datenpartner.

Objekttyp

  • Artikel

Beteiligte

  • Nordfang, Maj-Britt
  • Steffensen, Mogens
  • MDPI

Entstanden

  • 2017

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