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Reduced Form Mortgage Pricing as an Alternative to Option-Pricing Models


  • James Kau


  • Donald Keenan
  • Alexey Smurov


This paper extends the traditional hazard technique of estimating prepayment and default by allowing their baselines to be stochastic processes, rather than known paths of time, as is typically assumed. By working in the reduced form, this method offers an alternative to the empirical valuation of mortgages more easily implemented than the standard structural form approach of options pricing. Copyright Springer Science + Business Media, LLC 2006

Suggested Citation

  • James Kau & Donald Keenan & Alexey Smurov, 2006. "Reduced Form Mortgage Pricing as an Alternative to Option-Pricing Models," The Journal of Real Estate Finance and Economics, Springer, vol. 33(3), pages 183-196, November.
  • Handle: RePEc:kap:jrefec:v:33:y:2006:i:3:p:183-196 DOI: 10.1007/s11146-006-9981-7

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    References listed on IDEAS

    1. Robert A. Jarrow & David Lando & Fan Yu, 2008. "Default Risk And Diversification: Theory And Empirical Implications," World Scientific Book Chapters,in: Financial Derivatives Pricing Selected Works of Robert Jarrow, chapter 19, pages 455-480 World Scientific Publishing Co. Pte. Ltd..
    2. Duffie, Darrell & Lando, David, 2001. "Term Structures of Credit Spreads with Incomplete Accounting Information," Econometrica, Econometric Society, vol. 69(3), pages 633-664, May.
    3. Robert A. Jarrow & Stuart M. Turnbull, 2008. "Pricing Derivatives on Financial Securities Subject to Credit Risk," World Scientific Book Chapters,in: Financial Derivatives Pricing Selected Works of Robert Jarrow, chapter 17, pages 377-409 World Scientific Publishing Co. Pte. Ltd..
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    Cited by:

    1. Ming Pu & Gang-Zhi Fan & Chunsheng Ban, 2016. "The Pricing of Mortgage Insurance Premiums Under Systematic and Idiosyncratic Shocks," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 83(2), pages 447-474, June.
    2. repec:wsi:ijtafx:v:20:y:2017:i:08:n:s0219024917500509 is not listed on IDEAS
    3. Chiang, Shu Ling & Yang, Tyler T. & Tsai, Ming Shann, 2016. "Assessing mortgage servicing rights using a reduced-form model: Considering the effects of interest rate risks, prepayment and default risks, and random state variables," Journal of Housing Economics, Elsevier, vol. 32(C), pages 29-46.
    4. Jean-David Fermanian, 2013. "A Top-Down Approach for Asset-Backed Securities: A Consistent Way of Managing Prepayment, Default and Interest Rate Risks," The Journal of Real Estate Finance and Economics, Springer, vol. 46(3), pages 480-515, April.
    5. Steinbuks, Jevgenijs, 2015. "Effects of prepayment regulations on termination of subprime mortgages," Journal of Banking & Finance, Elsevier, vol. 59(C), pages 445-456.
    6. James Kau & Donald Keenan & Xiaowei Li, 2011. "An Analysis of Mortgage Termination Risks: A Shared Frailty Approach with MSA-Level Random Effects," The Journal of Real Estate Finance and Economics, Springer, vol. 42(1), pages 51-67, January.


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