Can ARMs' mortgage servicing portfolios be delta-hedged under gamma constraints?
AbstractOrtiz et al. [2008, 2009] develop models for portfolios of mortgage servicing rights (MSR) to be delta-hedged against interest rate risk. Their models rely on this fundamental relationship between prepayment rates (cpr) and interest rates, represented as a sigmoid function (S-shape). Defaults that lead to foreclosures or loan modifications on mortgages will either truncate or extend the stream of servicing income greeted by pools of adjustable rate mortgages. Ortiz et al.’s previous research focuses on mortgage services rights for fixed rate mortgages. In this paper we will extend their research to MSR for adjustable rate mortgages (ARMs).
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Bibliographic InfoArticle provided by Capco Institute in its journal Journal of Financial Transformation.
Volume (Year): 28 (2010)
Issue (Month): ()
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Adjustable rate mortgages; servicing; delta hedging; prepayment;
Find related papers by JEL classification:
- G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
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