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Prepayment and the Valuation of Mortgage-Backed Securities

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Author Info
 Schwartz, Eduardo S
Torous, Walter N
Abstract

This paper puts forward a valuation framework for mortgage-backed securities. Rather than imposing an optimal, value minimizing call condition, the authors assume that at each point in time there exists a probability of prepaying, this conditional probability depending upon the prevailing state of the economy. To implement their valuation procedure, the authors use maximum likelihood techniques to estimate a prepayment function in light of recent aggregate GNMA prepayment experience. By integrating this empirical prepayment function into their valuation framework, they provide a complete model to value mortgage-backed securities. Copyright 1989 by American Finance Association.

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Publisher Info
Article provided by American Finance Association in its journal Journal of Finance.

Volume (Year): 44 (1989)
Issue (Month): 2 (June)
Pages: 375-92
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Handle: RePEc:bla:jfinan:v:44:y:1989:i:2:p:375-92

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  3. Ralph S.J Koijen & Otto Van Hemert & Stijn Van Nieuwerburgh, 2007. "Mortgage Timing," NBER Working Papers 13361, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  4. Michael LaCour-Little & Gregory H. Chun, 1999. "Third Party Originators and Mortgage Prepayment Risk: An Agency Problem?," Journal of Real Estate Research, American Real Estate Society, vol. 17(1), pages 55-70. [Downloadable!]
  5. Francis A. Longstaff, 2004. "Optimal Recursive Refinancing and the Valuation of Mortgage-Backed Securities," NBER Working Papers 10422, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  6. Michael LaCour-Little & Michael Marschoun & Clark L. Maxam, 2002. "Improving Parametric Mortgage Prepayment Models with Non-parametric Kernel Regression," Journal of Real Estate Research, American Real Estate Society, vol. 24(3), pages 299-328. [Downloadable!]
  7. Stephen F. Thode & Richard J. Kish, 1994. "The Zero-Coupon/Interest-Only Fixed-Rate Mortgage: An Alternative for Funding Low-to-Moderate Income Housing," Journal of Real Estate Research, American Real Estate Society, vol. 9(2), pages 263-276. [Downloadable!]
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  9. Jonathan B. Berk & Ian Tonks, 2007. "Return Persistence and Fund Flows in the Worst Performing Mutual Funds," NBER Working Papers 13042, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  10. Chris Downing & Richard Stanton & Nancy Wallace, 2003. "An Empirical Test of a Two-Factor Mortgage Valuation Model: How Much Do House Prices Matter?," Research Program in Finance, Working Paper Series 1011, Research Program in Finance, Institute for Business and Economic Research, UC Berkeley. [Downloadable!]
  11. Yongheng Deng & John M. Quigley & Robert Van Order, 1995. "Mortgage Default and Low Downpayment Loans: The Costs of Public Subsidy," NBER Working Papers 5184, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  13. James B. Kau & Thomas M. Springer, 1993. "An Analysis of Financial and Nonfinancial Prepayment of GNMA Securities with a Varying Coefficient Model," Journal of Real Estate Research, American Real Estate Society, vol. 8(1), pages 69-86. [Downloadable!]
  14. Laureano F. Escudero Bueno & María Araceli Garín Martín & María Merino Maestre & Gloria Pérez Sainz de Rozas, 2005. "A two-stage stochastic integer programming approach ," BILTOKI 200501, Universidad del País Vasco - Departamento de Economía Aplicada III (Econometría y Estadística). [Downloadable!]
  15. Wayne Archer & David C. Ling & Gary A. McGill, 1995. "The Effect of Income and Collateral Constraints on Residential Mortgage Terminations," NBER Working Papers 5180, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  16. Svenstrup, Mikkel, 2003. "Valuation of Path-Dependent Interest Rate Derivatives in a Finite Difference Setup," Finance Working Papers 02-21, University of Aarhus, Aarhus School of Business, Department of Business Studies. [Downloadable!]
  17. Xavier Gabaix & Arvind Krishnamurthy & Olivier Vigneron, 2005. "Limits of Arbitrage: Theory and Evidence from the Mortgage-Backed Securities Market," NBER Working Papers 11851, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  18. Chris Downing & Richard Stanton & Nancy Wallace, 2003. "An empirical test of a two-factor mortgage valuation model: how much do house prices matter?," Finance and Economics Discussion Series 2003-42, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
  19. Sam R. Hakim, 1997. "Autonomous and Financial Mortgage Prepayment," Journal of Real Estate Research, American Real Estate Society, vol. 13(1), pages 1-16. [Downloadable!]
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