• ISSN: 2301-3567 (Print), 2972-3981 (Online)
    • Abbreviated Title: J. Econ. Bus. Manag.
    • Frequency: Quarterly
    • DOI: 10.18178/JOEBM
    • Editor-in-Chief: Prof. Eunjin Hwang
    • Executive Editor: Ms. Fiona Chu
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HOME > Archive > 2014 > Volume 2 Number 3 (Aug. 2014) >
JOEBM 2014 Vol.2(3): 224-228 ISSN: 2301-3567
DOI: 10.7763/JOEBM.2014.V2.129

An Analysis of the Impact of Transaction Cost on the Borrower‟s Refinancing Decisions

Di Jin, Jin Zheng, Nan Zhang, and Siwei Gan

Abstract—Assuming that the market interest rate follows the Vasicek model, this paper focuses on finding an optimal refinancing interest rate boundary where a proportional transaction fee is charged when the mortgage borrower decides to leverage on the refinancing strategy to lower his financial cost. An optimal refinancing premium is introduced by risk-neutral analysis, then is used to recursively determine the minimization of discounted payment streams of the mortgage contract. Intriguing properties of the optimal refinancing boundary are discovered with numerical simulations.

Index Terms—Mortgage refinancing, refinancing value, transaction fee, risk-neutral pricing.

Jin Di is with the Department of Mathematics, Xi‟an Jiaotong University, China (email: jindijindy@stu.xjtu.edu.cn).
Jin Zheng is with the Department of Mathematical Sciences, University of Liverpool, U.K (email: jin.zheng@liverpool.ac.uk)
Nan Zhang is with the Department of Computer Science and Software Engineering, Xi‟an Jiaotong Liverpool University, China (email: nan.zhang@xjtlu.edu.cn).
Siwei Gan is with the Department of Mathematical Sciences, Xi‟an Jiaotong Liverpool University, China (email: siwei.gan10@xjtlu.edu.cn).

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Cite:Di Jin, Jin Zheng, Nan Zhang, and Siwei Gan, "An Analysis of the Impact of Transaction Cost on the Borrower‟s Refinancing Decisions," Journal of Economics, Business and Management vol. 2, no. 3, pp. 224-228, 2014.

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