IDEAS home Printed from https://ideas.repec.org/a/taf/lstaxx/v50y2021i9p2117-2135.html
   My bibliography  Save this article

Pricing default risk in mortgage-backed securities under a regime-switching reduced-form model

Author

Listed:
  • Jie Guo
  • Xiaosong Qian
  • Guojing Wang

Abstract

In this paper, we propose a reduced-form model to price default risk in mortgages and fixed-rate pass-through mortgage-backed securities. Since the default of borrowers is often affected by macroeconomic conditions, we take into account the changes of market regimes. We introduce a default factor process to model the default risk of borrowers and define its exponential decreasing rate as default rate, which follows a shot-noise process. The model assumes that the interest rate and the default rate are all influenced by macroeconomic conditions described by a homogeneous Markov chain. Explicit pricing formulas for mortgage-backed securities with defaultable underlying mortgages are obtained through the conditional Laplace transform of the regime-switching shot-noise process. Numerical illustration is also presented to show the impact of model parameters on the price.

Suggested Citation

  • Jie Guo & Xiaosong Qian & Guojing Wang, 2021. "Pricing default risk in mortgage-backed securities under a regime-switching reduced-form model," Communications in Statistics - Theory and Methods, Taylor & Francis Journals, vol. 50(9), pages 2117-2135, May.
    • Handle: RePEc:taf:lstaxx:v:50:y:2021:i:9:p:2117-2135
    DOI: 10.1080/03610926.2019.1659971
    as

    Download full text from publisher

    File URL: http://hdl.handle.net/10.1080/03610926.2019.1659971
    Download Restriction: Access to full text is restricted to subscribers.
    File URL: https://libkey.io/10.1080/03610926.2019.1659971?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:taf:lstaxx:v:50:y:2021:i:9:p:2117-2135. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no bibliographic references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Chris Longhurst (email available below). General contact details of provider: http://www.tandfonline.com/lsta .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.