Option theory predicts that mortgage prepayment or default will be exercised by homeowners if the call or put option is sufficiently "in the money." This analysis: tests the extent to which the option approach explains default and prepayment behavior; evaluates the importance of modeling both...

As applied to the behavior of homeowners with mortgages, option theory predicts that mortgage prepayment or default will be exercised if the call or put option in "in the money" by some specific amount. Our analysis: tests the extent to which the option approach can explain default and...