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Computational Economics

, Volume 52, Issue 2, pp 479–492 | Cite as

Simulation Solution to a Two-Dimensional Mortgage Refinancing Problem

  • Dejun XieEmail author
  • Nan Zhang
  • David A. Edwards
Article

Abstract

This work studies a mortgage borrower’s optimal refinancing strategy, which is formulated as the solution to a stochastic minimization problem with contingent conditions. The problem is framed in a business economic environment where the underlying discounting factor and mortgage interest rate are assumed to follow a two-dimensional stochastic process of Vasicek type. A complete Monte Carlo algorithm is developed and implemented. This algorithm generates the optimal refinancing surface as a function of time and the risk-free rate. Numerical examples with financial implications are provided.

Keywords

Mortgage refinancing Stochastic modeling Monte Carlo simulation Financial optimization 

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Copyright information

© Springer Science+Business Media New York 2017

Authors and Affiliations

  1. 1.Department of FinanceSouth University of Science and Technology of ChinaShenzhenChina
  2. 2.Department of Computer Science and Software EngineeringXian Jiaotong-Liverpool UniversitySuzhouChina
  3. 3.Department of Mathematical SciencesUniversity of DelawareNewarkUSA

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