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Planning Your Own Debt

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  • Søren Nielsen
  • Rolf Poulsen

Abstract

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.

Suggested Citation

  • Søren Nielsen & Rolf Poulsen, 2002. "Planning Your Own Debt," European Financial Management, European Financial Management Association, vol. 8(2), pages 193-210, June.
    • Handle: RePEc:bla:eufman:v:8:y:2002:i:2:p:193-210
    DOI: 10.1111/1468-036X.00184
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    Cited by:

    1. S. Nielsen, Soren & Poulsen, Rolf, 2004. "A two-factor, stochastic programming model of Danish mortgage-backed securities," Journal of Economic Dynamics and Control, Elsevier, vol. 28(7), pages 1267-1289, April.
    2. Svenstrup, Mikkel, 2002. "Mortgage Choice - The Danish Case," Finance Working Papers 02-22, University of Aarhus, Aarhus School of Business, Department of Business Studies.

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