An Intensity-Based Approach To The Valuation Of Mortgage Contracts And Computation Of The Endogenous Mortgage Rate
AbstractThis paper gives a general mortgage model subject to sub-optimal prepayment behavior of borrowers. The proposed classification of approaches to the option-based and mortgage-rate-based (MRB) specification is validated by the fact that these two approaches require different analytical and numerical tools. With the option-based specification of the prepayment intensity, our model is the first continuous-time model; this gives advantage in the numerical treatment of the model. We propose a new approach based on the MRB idea with the endogenous mortgage rate process. The mortgage rate process is defined and the existence of a solution is proven for the option-based specification of the prepayment process. A numerical procedure for finding the endogenous mortgage rate is proposed.
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Bibliographic InfoArticle provided by World Scientific Publishing Co. Pte. Ltd. in its journal International Journal of Theoretical and Applied Finance.
Volume (Year): 09 (2006)
Issue (Month): 06 ()
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Web page: http://www.worldscinet.com/ijtaf/ijtaf.shtml
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- Dai, Min & Kwok, Yue Kuen & You, Hong, 2007. "Intensity-based framework and penalty formulation of optimal stopping problems," Journal of Economic Dynamics and Control, Elsevier, vol. 31(12), pages 3860-3880, December.
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