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An Empirical Investigation of Alternative Contingent Claims Models for Pricing Residential Mortgages

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  • Chatterjee, Amitava
  • Edmister, Robert O
  • Hatfield, Gay B

Abstract

Researchers have employed option pricing techniques to analyze mortgage financing and valuation. Alternative models (one-, two-, and three-variable models) employing different variables (short- and long-term interest rates and building value) have been designed to price mortgage securities. No prior research has addressed the question of whether the pricing accuracy of these contingent claims models improves as states increase or whether contingent claims models' valuation abilities generate reasonable estimates of primary mortgage market prices. The articles investigates the relative efficiency of each of these alternative mortgage valuation models in predicting primary market mortgage values. Our results show that a two-variable model (short rate and building value) is the most efficient. Valuation results indicate a positive pricing spread between the primary market and the theoretically estimated value. Copyright 1998 by Kluwer Academic Publishers

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  • Chatterjee, Amitava & Edmister, Robert O & Hatfield, Gay B, 1998. "An Empirical Investigation of Alternative Contingent Claims Models for Pricing Residential Mortgages," The Journal of Real Estate Finance and Economics, Springer, vol. 17(2), pages 139-162, September.
    • Handle: RePEc:kap:jrefec:v:17:y:1998:i:2:p:139-62
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    Cited by:

    1. Bilgi Yilmaz & A. Sevtap Selcuk-Kestel, 2019. "Computation of Hedging Coefficients for Mortgage Default and Prepayment Options: Malliavin Calculus Approach," The Journal of Real Estate Finance and Economics, Springer, vol. 59(4), pages 673-697, November.
    2. Nicholas Sharp & David Newton & Peter Duck, 2008. "An Improved Fixed-Rate Mortgage Valuation Methodology with Interacting Prepayment and Default Options," The Journal of Real Estate Finance and Economics, Springer, vol. 36(3), pages 307-342, April.

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