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Can ARMs' mortgage servicing portfolios be delta-hedged under gamma constraints?


  • Ortiz, Carlos

    () (Arcadia University)

  • Stone, Charles

    () (Brooklyn College, The City University of New York)

  • Zissu, Anne

    () (Citytech, The City University of New York & POLY-NYU)


Ortiz et al. [2008, 2009] develop models for portfolios of mortgage servicing rights (MSR) to be delta-hedged against interest rate risk. Their models rely on this fundamental relationship between prepayment rates (cpr) and interest rates, represented as a sigmoid function (S-shape). Defaults that lead to foreclosures or loan modifications on mortgages will either truncate or extend the stream of servicing income greeted by pools of adjustable rate mortgages. Ortiz et al.’s previous research focuses on mortgage services rights for fixed rate mortgages. In this paper we will extend their research to MSR for adjustable rate mortgages (ARMs).

Suggested Citation

  • Ortiz, Carlos & Stone, Charles & Zissu, Anne, 2010. "Can ARMs' mortgage servicing portfolios be delta-hedged under gamma constraints?," Journal of Financial Transformation, Capco Institute, vol. 28, pages 79-85.
  • Handle: RePEc:ris:jofitr:1410

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    More about this item


    Adjustable rate mortgages; servicing; delta hedging; prepayment;

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages


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