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Intensity-Based Models For Pricing Mortgage-Backed Securities With Repayment Risk Under A Cir Process

Listed author(s):
  • SEN WU

    (Department of Mathematics, Tongji University, Shanghai 200092, P. R. China)


    (Department of Mathematics, Tongji University, Shanghai 200092, P. R. China)



    (Department of Mathematics, Tongji University, Shanghai 200092, P. R. China)

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    Under a reduced-form framework, we establish models for pricing mortgage-backed securities with prepayment risk by introducing a stochastic prepayment factor. In the zero-default scenario, the pricing pass-through securities and sequential-pay collateralized mortgage obligation structures are considered. To solve the problems, we introduce a path-dependent variable, from which partial differential equation problems are obtained when the prepayment rate is modeled by a CIR process. Numerical solution to the pricing problem is obtained by developing an explicit characteristics difference scheme.

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    Article provided by World Scientific Publishing Co. Pte. Ltd. in its journal International Journal of Theoretical and Applied Finance.

    Volume (Year): 15 (2012)
    Issue (Month): 03 ()
    Pages: 1-17

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    Handle: RePEc:wsi:ijtafx:v:15:y:2012:i:03:p:1250021-1-1250021-17
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