Korean Journal of Mathematics

The Kangwon-Kyungki Mathematical Society (강원경기수학회)
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A PREPAYMENT-RISK-NEUTRAL PRICING MODEL FOR MORTGAGE-BACKED SECURITIES

  • Ahn, Seryoong (Division of Business Administration, Pukyong National University) ;
  • Song, Wan Young (Housing Finance Research Institute, Korea Housing-Finance Corporation) ;
  • Yoon, Ji-Hun (Department of Mathematics, Pusan National University)
  • Received : 2021.05.02
  • Accepted : 2021.06.15
  • Published : 2021.06.30
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Abstract

In this paper, we investigate a pricing model for mortgage-backed securities (MBSs) of a pay-through type of collateral mortgage obligation (CMO), embedded call options, which can be exercised by the intermediary, and pass-through MBSs. We suggest a prepayment-risk-neutral pricing model, applying a reduced-form prepayment rate model, and then compute and investigate the appropriate prices and spreads in the coupon rates between CMOs and PT MBSs. We believe that this study contributes in that it provides a sophisticated pricing model for MBSs, especially to the financial markets which are not advanced enough to finance with a simple type of MBSs.

Keywords

Acknowledgement

This work was supported by the Pukyong National University Research Fund in 2019 (C-D-2019-1542).

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