Mortgage Loan Portfolio Optimization Using Multi-Stage Stochastic Programming

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    Abstract

    We consider the dynamics of the Danish mortgage loan system and propose several models to reflect the choices of a mortgagor as well as his attitude towards risk. The models are formulated as multi stage stochastic integer programs, which are difficult to solve for more than 10 stages. Scenario reduction and LP relaxation are used to obtain near optimal solutions for large problem instances. Our results show that the standard Danish mortgagor should hold a more diversified portfolio of mortgage loans, and that he should rebalance the portfolio more frequently than current practice.
    Original languageEnglish
    JournalJournal of Economic Dynamics and Control
    Volume31
    Issue number3
    Pages (from-to)742-766
    ISSN0165-1889
    DOIs
    Publication statusPublished - 2007

    Keywords

    • Mortgage backed securities, Stochastic programming, Scenario reduction

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