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Option Theory and Defaultable Mortgage Pricing

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    Abstract

    The existing mortgage pricing literature either fails to consider the default option or gives numerical results only. Solutions using numerical methods not only do not provide the intuition of analytic solutions, but also are very expensive in computation time, since a supercomputer is frequently required. We, therefore, have employed the Cox-Ross [1976] approach to price a fixed-rate mortgage with a default option. We are able to provide analytic solutions, comparative statistics and more simulation results not available in existing models.

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    File URL: http://aux.zicklin.baruch.cuny.edu/jrer/papers/pdf/past/vol04n01/v04p053.pdf
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    Bibliographic Info

    Article provided by American Real Estate Society in its journal Journal of Real Estate Research.

    Volume (Year): 4 (1989)
    Issue (Month): 1 ()
    Pages: 53-59

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    Handle: RePEc:jre:issued:v:4:n:1:1989:p:53-59

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    Postal: American Real Estate Society Clemson University School of Business & Behavioral Science Department of Finance 401 Sirrine Hall Clemson, SC 29634-1323
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    Web page: http://www.aresnet.org/

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    Postal: Diane Quarles American Real Estate Society Manager of Member Services Clemson University Box 341323 Clemson, SC 29634-1323
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    Web: http://aux.zicklin.baruch.cuny.edu/jrer/about/get.htm

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    1. Cox, John C. & Ross, Stephen A., 1976. "The valuation of options for alternative stochastic processes," Journal of Financial Economics, Elsevier, vol. 3(1-2), pages 145-166.
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    Cited by:
    1. 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.

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