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Option Theory and Defaultable Mortgage Pricing

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Abstract

The existing mortgage pricing literature either fails to consider the default option or gives numerical results only. Solutions using numerical methods not only do not provide the intuition of analytic solutions, but also are very expensive in computation time, since a supercomputer is frequently required. We, therefore, have employed the Cox-Ross [1976] approach to price a fixed-rate mortgage with a default option. We are able to provide analytic solutions, comparative statistics and more simulation results not available in existing models.

Suggested Citation

  • Wai K. Leung, 1989. "Option Theory and Defaultable Mortgage Pricing," Journal of Real Estate Research, American Real Estate Society, vol. 4(1), pages 53-59.
  • Handle: RePEc:jre:issued:v:4:n:1:1989:p:53-59
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    File URL: http://pages.jh.edu/jrer/papers/pdf/past/vol04n01/v04p053.pdf
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    References listed on IDEAS

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    1. Cox, John C. & Ross, Stephen A., 1976. "The valuation of options for alternative stochastic processes," Journal of Financial Economics, Elsevier, vol. 3(1-2), pages 145-166.
    2. Dunn, Kenneth B & McConnell, John J, 1981. "Valuation of GNMA Mortgage-Backed Securities," Journal of Finance, American Finance Association, vol. 36(3), pages 599-616, June.
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    Cited by:

    1. Stephen F. Thode & Richard J. Kish, 1994. "The Zero-Coupon/Interest-Only Fixed-Rate Mortgage: An Alternative for Funding Low-to-Moderate Income Housing," Journal of Real Estate Research, American Real Estate Society, vol. 9(2), pages 263-276.

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    JEL classification:

    • L85 - Industrial Organization - - Industry Studies: Services - - - Real Estate Services

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