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Article: An Analysis of Variable Rate Residential Mortgage Prepayment in Hong Kong using Aggregate Data

TitleAn Analysis of Variable Rate Residential Mortgage Prepayment in Hong Kong using Aggregate Data
Authors
Issue Date2005
PublisherEmerald Group Publishing Ltd. The Journal's web site is located at http://www.emeraldinsight.com/info/journals/jfmpc/jfmpc.jsp
Citation
Journal of Financial Management of Property and Construction, 2005, v. 10 n. 3, p. 147-158 How to Cite?
AbstractA distinctive feature of mortgages as assets is the existence of prepayment risk, typically viewed as a borrower’s call option to pay the outstanding mortgage balance at any time during the term. While previous research identified important causes for prepayment, these studies are mostly based on fixed-rate mortgages, with little work on variable-rate or floating-rate mortgages and even less work on prepayment in countries other than the USA. This paper presents an analysis of prepayment based on the historical aggregate pre-payment experience of a sample of variable rate mortgages in Hong Kong, which func-tions under a Currency Board Mechanism that determines exogenously the level and term structure of interest rates. With variable rate mortgages, it is expected that there will not be a prepayment incentive with decreases in interest rates, unlike the case with fixed-rate mortgages. However, we argue that observed interest rate movements remain a key factor that affects prepayment decisions, because current interest changes influence expected future interest rates. Furthermore, drawing on quasi-rational and behavioral economics concepts, we expect the effect on prepayment of expected upward movement in interest rates to be stronger than that of expected downward movements. Empirical evidence from the adjustable rate residential mortgage sample from Hong Kong supports these expected relationships.
Persistent Identifierhttp://hdl.handle.net/10722/81730
ISSN
2015 SCImago Journal Rankings: 0.234

 

DC FieldValueLanguage
dc.contributor.authorPretorius, FIHen_HK
dc.contributor.authorSo, WMen_HK
dc.contributor.authorChau, KWen_HK
dc.date.accessioned2010-09-06T08:21:21Z-
dc.date.available2010-09-06T08:21:21Z-
dc.date.issued2005en_HK
dc.identifier.citationJournal of Financial Management of Property and Construction, 2005, v. 10 n. 3, p. 147-158en_HK
dc.identifier.issn1366-4387en_HK
dc.identifier.urihttp://hdl.handle.net/10722/81730-
dc.description.abstractA distinctive feature of mortgages as assets is the existence of prepayment risk, typically viewed as a borrower’s call option to pay the outstanding mortgage balance at any time during the term. While previous research identified important causes for prepayment, these studies are mostly based on fixed-rate mortgages, with little work on variable-rate or floating-rate mortgages and even less work on prepayment in countries other than the USA. This paper presents an analysis of prepayment based on the historical aggregate pre-payment experience of a sample of variable rate mortgages in Hong Kong, which func-tions under a Currency Board Mechanism that determines exogenously the level and term structure of interest rates. With variable rate mortgages, it is expected that there will not be a prepayment incentive with decreases in interest rates, unlike the case with fixed-rate mortgages. However, we argue that observed interest rate movements remain a key factor that affects prepayment decisions, because current interest changes influence expected future interest rates. Furthermore, drawing on quasi-rational and behavioral economics concepts, we expect the effect on prepayment of expected upward movement in interest rates to be stronger than that of expected downward movements. Empirical evidence from the adjustable rate residential mortgage sample from Hong Kong supports these expected relationships.-
dc.languageengen_HK
dc.publisherEmerald Group Publishing Ltd. The Journal's web site is located at http://www.emeraldinsight.com/info/journals/jfmpc/jfmpc.jspen_HK
dc.relation.ispartofJournal of Financial Management of Property and Constructionen_HK
dc.titleAn Analysis of Variable Rate Residential Mortgage Prepayment in Hong Kong using Aggregate Dataen_HK
dc.typeArticleen_HK
dc.identifier.emailPretorius, FIH: fredpre@hkucc.hku.hken_HK
dc.identifier.emailChau, KW: hrrbckw@hkucc.hku.hken_HK
dc.identifier.authorityPretorius, FIH=rp01018en_HK
dc.identifier.authorityChau, KW=rp00993en_HK
dc.identifier.doi10.1108/13664380580001072-
dc.identifier.hkuros123519en_HK
dc.identifier.volume10-
dc.identifier.issue3-
dc.identifier.spage147-
dc.identifier.epage158-
dc.publisher.placeUnited Kingdom-

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