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Pricing Mortgage-Backed Securities. A Model Describing the Heterogeneity of a Mortgage Pool

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  • Takeaki Kariya

Abstract

Using a discrete time approach, this paper presents a no-arbitrage pricing formula for MBSs (mortgage-backed securities), and taking into the heterogeneity of a mortgage pool, proposes a specific model for MBS prices that describes the so-called burnout phenomenon of prepayments due to refinance, sale of houses for mortgage, and default. This is a generalized version of Kariya and Kobayashi (2000) in which only refinance is considered for prepayment. The heterogeneity of the mortgage pool is expressed by different response functions of mortgage borrowers to the changes of interest rates and the price changes of equities or houses. Numerical examples for pricing MBSs are demonstrated together with certain specifications of interest model and price model. An estimation procedure is provided based on a recursive least squares method. The discrete time no arbitrage theory is discussed in Appendix.

Suggested Citation

  • Takeaki Kariya, 2001. "Pricing Mortgage-Backed Securities. A Model Describing the Heterogeneity of a Mortgage Pool," ERES eres2001_195, European Real Estate Society (ERES).
    • Handle: RePEc:arz:wpaper:eres2001_195
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    JEL classification:

    • R3 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Real Estate Markets, Spatial Production Analysis, and Firm Location

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