Estimating Dynamic Models with Aggregate Shocks and an Application to Mortgage Default in Colombia

46 Pages Posted: 23 Jun 2010

See all articles by Juan Esteban Carranza

Juan Esteban Carranza

Universidad ICESI - Economics & Management

Salvador Navarro

University of Western Ontario - Department of Economics

Date Written: June 21, 2010

Abstract

We estimate a dynamic model of mortgage default for a cohort of Colombian debtors between 1997 and 2004. We use the estimated model to study the effects on default of a class of policies that affected the evolution of mortgage balances in Colombia during the 1990's. We propose a framework for estimating dynamic behavioral models accounting for the presence of unobserved state variables that are correlated across individuals and across time periods. We extend the standard literature on the structural estimation of dynamic models by incorporating an unobserved common correlated shock that affects all individuals' static payoffs and the dynamic continuation payoffs associated with different decisions. Given a standard parametric specification the dynamic problem, we show that the aggregate shocks are identified from the variation in the observed aggregate behavior. The shocks and their transition are separately identified, provided there is enough cross-sectional variation of the observed states.

Keywords: Dynamic discrete probit, Mortgage

JEL Classification: D10, L11

Suggested Citation

Carranza, Juan E. and Navarro, Salvador, Estimating Dynamic Models with Aggregate Shocks and an Application to Mortgage Default in Colombia (June 21, 2010). Universidad Icesi Department of Economics Research Paper No. 24, Available at SSRN: https://ssrn.com/abstract=1628279 or http://dx.doi.org/10.2139/ssrn.1628279

Juan E. Carranza (Contact Author)

Universidad ICESI - Economics & Management ( email )

Cali
Colombia

Salvador Navarro

University of Western Ontario - Department of Economics ( email )

Department of Economics
Social Science Centre
London, Ontario N6A 5B8
Canada
519-661-2111 ext 81586 (Phone)
519-661-3666 (Fax)

HOME PAGE: http://sites.google.com/site/econsalvador

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