In the earlier version, we found that Loan-to-Value at origination predicted default probability, even after controlling for market-to-market (i.e., contemporaneous) LTV. We now find that the results are robust to whether we look at LTV at origination, dollar amount of the down-payment, or down-payment relative to income. This is consistent with prospect theory--borrowers show aversion to [realizing the loss] on their down-payments, even when walking away seems to make sense financially.
The paper is on SSRN.
[Thanks to Tstockmann for more correct wording on prospect theory].
Subscribe to:
Post Comments (Atom)
3 comments:
"This is consistent with prospect theory--borrowers show aversion to losing their down-payments, even when walking away seems to make sense financially."
Consistent with sunk cost, shouldn't this be realizing the loss of their down-payments?
This is consistent with prospect theory . I am impressed.
thanks for sharing
Antalya Homes Construction
Prospect theory could be inconsistent sometimes, but I must say that this one fits all the basic tenets of prospect theory. I'd like to ask if you have a sort of job board software in this site? sho
Post a Comment