2005
Abstract:
This paper extends unobserved heterogeneity to the multinomial logit model (MNL) framework
in the context of mortgages terminated by refinance, move, or default. It tests for the importance
of unobserved heterogeneity when borrower characteristics such as income, age and credit score
are included to capture lender-observed heterogeneity. It does this by comparing the
proportional hazard model (PHM) to MNL with and without mass-point estimates of unobserved
heterogeneous groups of borrowers.
The mass point mixed hazard model (MMH) yields larger and more significant coefficients for
several important variables in the move model, whereas the MNL model without unobserved
heterogeneity performs well with the refinance estimates. The MMH clearly dominates the
alternative models in-sample and out-of-sample. However, it is sometimes difficult to obtain
convergence for the models estimated jointly with mass points.
