Italian banks face increased risk as mortgage prepayment option prices rise.
The article examines how Italian banks determine when borrowers will pay off their mortgages early. They use a model to measure this prepayment option, focusing on refinancing. The study shows that higher volatility leads to higher option prices. When interest rates rise steeply, the price of the prepayment option becomes more sensitive to changes in volatility. Additionally, the price of the prepayment option decreases as credit spreads and transaction costs increase.