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Intensity-Based Models For Pricing Mortgage-Backed Securities With Repayment Risk Under A Cir Process

Author

Listed:
  • SEN WU

    (Department of Mathematics, Tongji University, Shanghai 200092, P. R. China)

  • LISHANG JIANG

    (Department of Mathematics, Tongji University, Shanghai 200092, P. R. China)

  • JIN LIANG

    (Department of Mathematics, Tongji University, Shanghai 200092, P. R. China)

Abstract

Under a reduced-form framework, we establish models for pricing mortgage-backed securities with prepayment risk by introducing a stochastic prepayment factor. In the zero-default scenario, the pricing pass-through securities and sequential-pay collateralized mortgage obligation structures are considered. To solve the problems, we introduce a path-dependent variable, from which partial differential equation problems are obtained when the prepayment rate is modeled by a CIR process. Numerical solution to the pricing problem is obtained by developing an explicit characteristics difference scheme.

Suggested Citation

  • Sen Wu & Lishang Jiang & Jin Liang, 2012. "Intensity-Based Models For Pricing Mortgage-Backed Securities With Repayment Risk Under A Cir Process," International Journal of Theoretical and Applied Finance (IJTAF), World Scientific Publishing Co. Pte. Ltd., vol. 15(03), pages 1-17.
    • Handle: RePEc:wsi:ijtafx:v:15:y:2012:i:03:n:s0219024912500215
    DOI: 10.1142/S0219024912500215
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    Cited by:

    1. Justin Sirignano & Kay Giesecke, 2019. "Risk Analysis for Large Pools of Loans," Management Science, INFORMS, vol. 65(1), pages 107-121, January.

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