Modeling Interest Rate Risk in Swedish Mortgages Using Survival Analysis

Abstract

This thesis investigates interest-rate risk in Swedish adjustable-rate mortgages by combining survival analysis with mortgage valuation techniques. The objective is to estimate the behavioral maturity of mortgage loans and model interest rate sensitivity. Using mortgage data from Handelsbanken, mortgage prepayment behavior is modeled through parametric survival analysis, with particular emphasis on shifted gamma frailty models to capture unobserved heterogeneity among borrowers. A mortgage-rate forecasting model is developed to describe the relationship between mortgage rates and risk-free market rates for a banking industry average. The estimated survival model is integrated with a valuation framework to determine effective mortgage maturity, duration, and portfolio sensitivity under various interest-rate environments. Results show that Swedish three-month adjustable-rate mortgages exhibit longer behavioral maturities. This is driven by incomplete passthrough of market interest rates to mortgage rates and persistent borrower behavior. Stress-testing based on Basel-inspired interest-rate shock scenarios demonstrates that mortgage portfolios are particularly vulnerable to rising interest rates. The findings indicate that financing adjustable-rate mortgages exclusively with shortduration liabilities may underestimate the true level of interest-rate risk. This highlights the importance of incorporating behavioral maturity into asset–liability management and provides a practical way for evaluating mortgage-related interest-rate risk in the Swedish banking sector. Keywords: