Abstract: This thesis shows that while macro variables and default rates share common cycles for conventional US mortgages,
a unique cycle is observed for loss given default, implying that the relation between the default rate
and loss given default is weak for conventional US mortgages. The average loss given default across the US
increases from 2002 until the end of the data set in 2014. Similar increases are observed across the U.S. Census
Bureau’s defined regions, although the West region shows losses that seem impacted by the financial crisis of
2007-2008. The research finds evidence of a unique cycle for loss given default across the US as well as for
specific regions, moreover this cycle is also present for uninsured mortgage loans with a high enough loan to
value at origination ratio. The research uses a mixed-measurement dynamic factor model that applies a mixture
of gaussians to capture the dynamics of a bimodal loss given default distribution. The finding of a unique loss
given default cycle for conventional US mortgage loans is innovative, as previous research primarily focuses on
corporate loans and finds a shared cycle between defaults and losses.
Publication Year: 2018
Publication Date: 2018-05-17
Language: en
Type: article
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