Anatomy of an ARM: The Interest-Rate Risk of Adjustable-Rate Mortgages
This article analyzes the dynamics of the commonly used indices for adjustable rate mortgages and systematically compares the effects of their time-series properties on the interest-rate sensitivity of adjustable-rate mortgages. Our ARM valuation methodology allows us simultaneously to capture the effects of index dynamics, discrete coupon adjustment, mortgage prepayment, and both lifetime and periodic caps and floors. We can, moreover, either calculate an optimal prepayment strategy for mortgage holders or use an empirical prepayment function. We find that the different dynamics of the major ARM indices lead to significant variation in the interest-rate sensitivities of loans based on different indices. We also find that changing assumptions about contract features, such as loan caps and coupon reset frequency, has a significant, and in some cases unexpected, impact on our results. Copyright 1999 by Kluwer Academic Publishers
If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.
Volume (Year): 19 (1999)
Issue (Month): 1 (July)
|Contact details of provider:|| Web page: http://www.springer.com|
|Order Information:||Web: http://www.springer.com/economics/regional+science/journal/11146/PS2|