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Pricing Defaulted Italian Mortgages

Author

Listed:
  • Michela Pelizza

    (Department of Economics, University of Manchester, Manchester M13 9PL, UK)

  • Klaus R. Schenk-Hoppé

    (Department of Economics, University of Manchester, Manchester M13 9PL, UK)

Abstract

Our paper forecasts the expected recovery rates of defaulted Italian mortgage loans backed by either residential or commercial real estate. We apply an exponential Ornstein–Uhlenbeck process to model the price dynamics at the provincial and regional level, and two haircut models to estimate the liquidation value. Compared to our findings, rating agencies such as Moody’s, which use geometric Brownian motion to model the price dynamics, paint a rosier picture with higher recovery rates. As a consequence, non-performing mortgage loans held by Italian banks might be overvalued.

Suggested Citation

  • Michela Pelizza & Klaus R. Schenk-Hoppé, 2020. "Pricing Defaulted Italian Mortgages," JRFM, MDPI, vol. 13(2), pages 1-14, February.
    • Handle: RePEc:gam:jjrfmx:v:13:y:2020:i:2:p:31-:d:318795
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    References listed on IDEAS

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    3. Amit K. Sinha, 2021. "The reliability of geometric Brownian motion forecasts of S&P500 index values," Journal of Forecasting, John Wiley & Sons, Ltd., vol. 40(8), pages 1444-1462, December.

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