Browse > Article
http://dx.doi.org/10.11568/kjm.2021.29.2.409

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)
Publication Information
Korean Journal of Mathematics / v.29, no.2, 2021 , pp. 409-424 More about this Journal
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
Morgage-Backed Securities; Prepayment; Call Option;
Citations & Related Records
연도 인용수 순위
  • Reference
1 Hull, J. C. and A. White, Pricing Interest-Rate Derivative Securities, Review of Financial Studies, 3 (5) (1990), 573-592.   DOI
2 Jeon, D., Estimation of Parameters in Equilibrium Interest Rate Models, Sungkyunkwan University 2013.
3 Kau, J. B., D. C. Keenan, and A. A. Smurov, Reduced-Form Mortgage Valuation, Working Paper, University of Georgia 2004.
4 Kolbe, A. and R. Zagst, A Hybrid-Form Model for the Prepayment-Risk-Neutral Valuation of Mortgage-Backed Securities, International Journal of Theoretical and Applied Finance, 11 (6) (2008), 635-656.   DOI
5 Levin, A. and A. Davidson, Prepayment Risk and Option-Adjusted Valuation of MBS, Journal of Portfolio Management, 31 (4) (2005), 73-85.   DOI
6 Levin, A. and A. Davidson, The Concept of Credit OAS in Valuation of MBS, Journal of Portfolio Management, 34 (3) (2008), 41-55.   DOI
7 Richard, S. F. and R. Roll, Prepayment on Fixed-Rate Mortgage-Backed Securities, Journal of Portfolio Management, 15 (3) (1989), 73-82.   DOI
8 Schwartz E. S. and W. N. Torous, Prepayment and the Valuation of Mortgage-Backed Securities, Journal of Finance, 44 (2) (1989), 375-392.   DOI
9 Sing T. F. and S. E. Ong, Residential Mortgage-Backed Securitization in Asia: The Singapore Experience, Journal of Real Estate Literature, 12 (2) (2004), 159-179.
10 Longstaff, F. A. and E. S. Schwartz, Valuing American Options by Simulation: A Simple Least-Squares Approach, Review of Financial Studies, 14 (1) (2001), 113-147.   DOI
11 Chernov, M., B. R. Dunn, and F. A. Longstaff, Macroeconomic-Driven Prepayment Risk and the Valuation of Mortgage-Backed Securities, National Bureau of Economic Research 2016.
12 Cheyette, O., Implied Prepayments, Journal of Portfolio Management 23 (1) (1996), 107-115.   DOI
13 Vasicek, O., An Equilibrium Characterization of the Term Structure, Journal of Financial Economics, 5 (1977), 177-188.   DOI
14 Dunn, K. B. and J. J. McConnell, Valuation of GNMA Mortgage-Backed Securities, Journal of Finance, 36 (3) (1981b), 599-616.   DOI
15 Tae, H. W., U. G. Seo, B. G. Jang, J. Kim, J. H. Roh, and S. Ahn, The Valuation of Pass-Through Mortgage-Backed Securities in Korean Market, Korean Journal of Futures and Options, 25 (3) (2017), 305-337.
16 Dunn, K. B. and J. J. McConnell, A Comparison of Alternative Models for Pricing GNMA Mortgage-Backed Securities, Journal of Finance, 36 (2) (1981a), 471-484.   DOI
17 Carlin, B. I., F. A. Longstaff, and K. Matoba, Disagreement and Asset Prices, Journal of Financial Economics 114 (2) (2014), 226-238.   DOI
18 Cohler, G., M. Feldman, and B. Lancaster, Price of Risk Constant (PORC) Going Beyond OAS, The Journal of Fixed Income 6 (4) (1997), 6-15.   DOI
19 Deng, Y., J. M. Quigley, and R. V. Order, Mortgage Terminations, Heterogeneity and the Exercise of Mortgage Options, Econometrica, 68 (2) (2000), 275-307.   DOI
20 Fabozzi, F. J., The Handbook of Mortgage-Backed Securities, Oxford University Press 2016.
21 Kang, P. and S. A. Zenios, Complete Prepayment Models for Mortgage-Backed Securities, Management Science, 38 (11) (1992), 1665-1685.   DOI