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Effects of jump-diffusion models for the house price dynamics in the pricing of fixed-rate mortgages, insurance and coinsurance

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  • Calvo-Garrido, María del Carmen
  • Vázquez, Carlos

Abstract

In the pricing of fixed rate mortgages with prepayment and default options, we introduce jump-diffusion models for the house price evolution. These models take into account sudden changes in the price (jumps) during bubbles and crisis situations in real estate markets. After posing the models based on partial-integro differential equations (PIDE) problems for the contract, insurance and the fraction of the total loss not covered by the insurance (coinsurance), we propose appropriate numerical methods to solve them.

Suggested Citation

  • Calvo-Garrido, María del Carmen & Vázquez, Carlos, 2015. "Effects of jump-diffusion models for the house price dynamics in the pricing of fixed-rate mortgages, insurance and coinsurance," Applied Mathematics and Computation, Elsevier, vol. 271(C), pages 730-742.
    • Handle: RePEc:eee:apmaco:v:271:y:2015:i:c:p:730-742
    DOI: 10.1016/j.amc.2015.09.051
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    Cited by:

    1. Gong, Xiaoye & Li, Ying & Wu, Yang-Che & Yang, Wan-Shiou, 2020. "Pricing various types of mortgage insurances with disposal and discount costs under a mean-reverting Lévy housing price process," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 551(C).

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