IDEAS home Printed from https://ideas.repec.org/h/eme/aecozz/s0731-905320200000041014.html
   My bibliography  Save this book chapter

Mortgage Portfolio Diversification in the Presence of Cross-Sectional and Spatial Dependence

In: Essays in Honor of Cheng Hsiao

Author

Listed:
  • Timothy Dombrowski
  • R. Kelley Pace
  • Rajesh P. Narayanan

Abstract

Portfolios of mortgage loans played an important role in the Great Recession and continue to compose a material part of bank assets. This chapter investigates how cross-sectional dependence in the underlying properties flows through to the loan returns, and thus, the risk of the portfolio. At one extreme, a portfolio of foreclosed mortgage loans becomes a portfolio of real estate whose returns exhibit substantial cross-sectional and spatial dependence. Near the other extreme, almost all loans perform and yield constant returns, which do not correlate with other performing loan returns. This suggests that loan performance effectively censors the random returns of the underlying properties. Following the statistical properties of the correlations among censored variables, the authors build off this foundation and show how the loan return correlations will rise as economic conditions deteriorate and the defaulting loans reveal the underlying housing correlations. In this chapter, the authors (1) adapt tools from spatial statistics to document substantial cross-sectional dependence across house price returns and examine the spatial structure of this dependence, (2) investigate the nonlinear nature of correlations among loan returns as a function of the default rate and the underlying house price correlations, and (3) conduct a simulation exercise using parameters from the empirical data to show the implications for holding a portfolio of mortgages.

Suggested Citation

  • Timothy Dombrowski & R. Kelley Pace & Rajesh P. Narayanan, 2020. "Mortgage Portfolio Diversification in the Presence of Cross-Sectional and Spatial Dependence," Advances in Econometrics, in: Essays in Honor of Cheng Hsiao, volume 41, pages 383-411, Emerald Group Publishing Limited.
    • Handle: RePEc:eme:aecozz:s0731-905320200000041014
    DOI: 10.1108/S0731-905320200000041014
    as

    Download full text from publisher

    File URL: https://www.emerald.com/insight/content/doi/10.1108/S0731-905320200000041014/full/html?utm_source=repec&utm_medium=feed&utm_campaign=repec
    Download Restriction: Access to full text is restricted to subscribers
    File URL: https://www.emerald.com/insight/content/doi/10.1108/S0731-905320200000041014/full/epub?utm_source=repec&utm_medium=feed&utm_campaign=repec&title=10.1108/S0731-905320200000041014
    Download Restriction: Access to full text is restricted to subscribers
    File URL: https://www.emerald.com/insight/content/doi/10.1108/S0731-905320200000041014/full/pdf?utm_source=repec&utm_medium=feed&utm_campaign=repec
    Download Restriction: Access to full text is restricted to subscribers
    File URL: https://libkey.io/10.1108/S0731-905320200000041014?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    --->

    As the access to this document is restricted, you may want to

    for a different version of it.

    More about this item

    Keywords

    ;
    ;
    ;
    ;
    ;
    ;

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eme:aecozz:s0731-905320200000041014. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no bibliographic references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Emerald Support (email available below). General contact details of provider: .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.