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Pricing of cap-interest rates based on renewal processes

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Author Info

  • Jan Beran

    ()
    (Department of Mathematics and Statistics, University of Konstanz)

  • Dirk Ocker

    ()
    (Department Risk Management, The Swiss Union of Raiffeisen-Banks)

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    Abstract

    Pricing of cap insurance contracts is considered for political mortgage rates. A simple stochastic process for mortgage rates is proposed. The process is based on renewal processes for modelling the length of periods with downward and upward trend respectively. Prices are calculated by simulation of conditional future sample paths. Future conditional quantiles can be obtained to assess the risk of a contract. The method is illustrated by applying it to observed quarterly mortgage rates of the Swiss Union of Raiffeisenbanks for the years 1970 to 2001.

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    File URL: http://cofe.uni-konstanz.de/Papers/dp02_10.pdf
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    Bibliographic Info

    Paper provided by Center of Finance and Econometrics, University of Konstanz in its series CoFE Discussion Paper with number 02-10.

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    Length: 16 pages
    Date of creation: 15 Mar 2002
    Date of revision:
    Handle: RePEc:knz:cofedp:0210

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    Related research

    Keywords: cap; cap rate; cap insurance; interest rate; mortgage; premium; renewal process; Poisson process; prediction;

    References

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    1. Tkacz, Greg, 2000. "Estimating the Fractional Order of Integration of Interest Rates Using a Wavelet OLS Estimator," Working Papers 00-5, Bank of Canada.
    2. Yvon Fauvel & Alain Paquet & Christian Zimmermann, 1999. "A Survey on Interest Rate Forecasting," Cahiers de recherche CREFE / CREFE Working Papers 87, CREFE, Université du Québec à Montréal.
    3. Beran, Jan & Feng, Yuanhua, 2002. "SEMIFAR models--a semiparametric approach to modelling trends, long-range dependence and nonstationarity," Computational Statistics & Data Analysis, Elsevier, vol. 40(2), pages 393-419, August.
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