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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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  4. Nicholas Sharp & David Newton & Peter Duck, 2008. "An Improved Fixed-Rate Mortgage Valuation Methodology with Interacting Prepayment and Default Options," The Journal of Real Estate Finance and Economics, Springer, vol. 36(3), pages 307-342, April. [Downloadable!] (restricted)
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  14. 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!]
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