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An Intensity-Based Approach To The Valuation Of Mortgage Contracts And Computation Of The Endogenous Mortgage Rate

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  • YEVGENY GONCHAROV

    ()
    (Department of Mathematics, Florida State University, 202A Love Bldg, Tallahassee, FL 32303, USA)

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    Abstract

    This 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 Info

    Article 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 ()
    Pages: 889-914

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    Handle: RePEc:wsi:ijtafx:v:09:y:2006:i:06:p:889-914

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    Related research

    Keywords: Mortgage; option-based approach; prepayment; intensity; mortgage rate;

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    Cited by:
    1. 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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