Explicit formulas for pricing of callable mortgage-backed securities in a case of prepayment rate negatively correlated with interest rates (Q432394): Difference between revisions
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The authors consider the valuation of Mortgage-Backed Securities in a reduced-form modeling framework. The main feature of the valuation model is to introduce an exponential process for modeling a prepayment factor. The prepayment rate is assumed to be inversely proportional to a stochastic interest rate, where the dynamics of the interest rate are governed by a CIR process. A partial differential equation approach is used to value Mortgage-Backed Securities. In particular, explicit pricing formulas are obtained for the pass-through Mortgage-Backed Securities and semi-analytical formulas are derived for Collateralized Mortgage Obligations. Numerical examples are provided to illustrate the effects of mortgage parameters on the prices of Mortgage-Backed Securities and to explain the negative correlation between the prices of Mortgage-Backed Securities and interest rates. | |||
Property / review text: The authors consider the valuation of Mortgage-Backed Securities in a reduced-form modeling framework. The main feature of the valuation model is to introduce an exponential process for modeling a prepayment factor. The prepayment rate is assumed to be inversely proportional to a stochastic interest rate, where the dynamics of the interest rate are governed by a CIR process. A partial differential equation approach is used to value Mortgage-Backed Securities. In particular, explicit pricing formulas are obtained for the pass-through Mortgage-Backed Securities and semi-analytical formulas are derived for Collateralized Mortgage Obligations. Numerical examples are provided to illustrate the effects of mortgage parameters on the prices of Mortgage-Backed Securities and to explain the negative correlation between the prices of Mortgage-Backed Securities and interest rates. / rank | |||
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Property / reviewed by | |||
Property / reviewed by: Tak Kuen Siu / rank | |||
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Property / Mathematics Subject Classification ID | |||
Property / Mathematics Subject Classification ID: 91G30 / rank | |||
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Property / zbMATH DE Number | |||
Property / zbMATH DE Number: 6052866 / rank | |||
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Property / zbMATH Keywords | |||
mortgage-backed securities | |||
Property / zbMATH Keywords: mortgage-backed securities / rank | |||
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Property / zbMATH Keywords | |||
prepayment risk | |||
Property / zbMATH Keywords: prepayment risk / rank | |||
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Property / zbMATH Keywords | |||
reduced form model | |||
Property / zbMATH Keywords: reduced form model / rank | |||
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Property / zbMATH Keywords | |||
prepayment factor | |||
Property / zbMATH Keywords: prepayment factor / rank | |||
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Revision as of 00:11, 30 June 2023
scientific article
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English | Explicit formulas for pricing of callable mortgage-backed securities in a case of prepayment rate negatively correlated with interest rates |
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Explicit formulas for pricing of callable mortgage-backed securities in a case of prepayment rate negatively correlated with interest rates (English)
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4 July 2012
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The authors consider the valuation of Mortgage-Backed Securities in a reduced-form modeling framework. The main feature of the valuation model is to introduce an exponential process for modeling a prepayment factor. The prepayment rate is assumed to be inversely proportional to a stochastic interest rate, where the dynamics of the interest rate are governed by a CIR process. A partial differential equation approach is used to value Mortgage-Backed Securities. In particular, explicit pricing formulas are obtained for the pass-through Mortgage-Backed Securities and semi-analytical formulas are derived for Collateralized Mortgage Obligations. Numerical examples are provided to illustrate the effects of mortgage parameters on the prices of Mortgage-Backed Securities and to explain the negative correlation between the prices of Mortgage-Backed Securities and interest rates.
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mortgage-backed securities
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prepayment risk
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reduced form model
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prepayment factor
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