The University of Southampton
University of Southampton Institutional Repository

Application of survival analysis to cash flow modelling for mortgage products

Thomas, Lyn C., McDonald, Ross and Matuszyk, A. (2010) Application of survival analysis to cash flow modelling for mortgage products OR Insight, 23, (1), pp. 1-14. (doi:10.1057/ori.2009.15).

Record type: Article


In this article, we describe the construction and implementation of a pricing model for a leading UK mortgage lender. The crisis in mortgage lending has highlighted the importance of incorporating default risk into such pricing decisions by mortgage lenders. In this case the underlying default model is based on survival analysis, which allows the estimation of month-to-month default probabilities at a customer level. The Cox proportional hazards estimation approach adopted is able to incorporate both endogenous variables (customer-specific attributes) and time-covariates relating to the macro-economy. This allows the lender to construct a hypothetical mortgage portfolio, specify one or more economic scenarios, and forecast discounted monthly cash flow for the lifetime of the loans. Monte Carlo simulation is used to compute different realisations of default and attrition rates for the portfolio over a future time horizon and thereby estimate a distribution of likely profit. This differs from a traditional scorecard approach in that it is possible to forecast default rates continually over a time period rather than within a fixed horizon, which allows the simulation of cash flow, and differs from the company's existing pricing model in incorporating the possibilities of both default and early closure.

Microsoft Word coventryiinsightrevision.doc - Other
Download (379kB)
Microsoft Word coventry0508.doc - Other
Download (933kB)

More information

Published date: April 2010


Local EPrints ID: 155019
PURE UUID: 7b2352df-1a2c-49e3-b369-ef28aa78acc8

Catalogue record

Date deposited: 02 Jun 2010 14:10
Last modified: 18 Jul 2017 12:45

Export record



Author: Lyn C. Thomas
Author: Ross McDonald
Author: A. Matuszyk

University divisions

Download statistics

Downloads from ePrints over the past year. Other digital versions may also be available to download e.g. from the publisher's website.

View more statistics

Atom RSS 1.0 RSS 2.0

Contact ePrints Soton:

ePrints Soton supports OAI 2.0 with a base URL of

This repository has been built using EPrints software, developed at the University of Southampton, but available to everyone to use.

We use cookies to ensure that we give you the best experience on our website. If you continue without changing your settings, we will assume that you are happy to receive cookies on the University of Southampton website.