Mortgage Default in Local Markets

Using recent theoretical advances and an extensive panel data set on metropolitan areas, this study provides new tests of the contingent claims based model of default. The empirical modeling incorporates a full complement of variables that permit direct tests of the options‐based model including the conditional effects of age and rent‐to‐price ratios. The role of transaction costs and trigger events is examined, and the results confirm the importance of both. The effects of aggregation and short sample periods are explored and demonstrated to affect inference in studies of mortgage default.