Portfolio optimization and mortgage choice

Artikel

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.

Object Details

• Language: Englisch

References and Relationships

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

Classification and Topics

• Classification: Management
• Subject: optimal mortgage choice ; stochastic control theory ; stochastic interest rate

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Nordfang, Maj-Britt ; Steffensen, Mogens
• Event: Veröffentlichung
• (who): MDPI
• (where): Basel
• (when): 2017

Further information

• DOI: doi:10.3390/jrfm10010001
• Handle: http://hdl.handle.net/10419/178582
• Last update: 10.03.2025, 11:45 AM CET