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Prepayment Risk And The Duration Of Default‐Free Mortgage‐Backed Securities

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  • Gary A. Anderson
  • Joel R. Barber
  • Chun‐Hao Chang

Abstract

The conventional duration measure for mortgage‐backed pass‐through securities assumes that the prepayment rate is invariant to changes in market interest rates. In this paper, the conventional duration is modified to take into account the interest‐rate sensitivity of mortgage prepayments. Including interest rate sensitivity is shown to reduce substantially the duration of a mortgage‐backed pass‐through security when the current mortgage rate is less than the contract rate.

Suggested Citation

  • Gary A. Anderson & Joel R. Barber & Chun‐Hao Chang, 1993. "Prepayment Risk And The Duration Of Default‐Free Mortgage‐Backed Securities," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 16(1), pages 1-9, March.
    • Handle: RePEc:bla:jfnres:v:16:y:1993:i:1:p:1-9
    DOI: 10.1111/j.1475-6803.1993.tb00122.x
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    Cited by:

    1. Raymond Chiang & Thomas F. Gosnell & Andrea J. Heuson, 1997. "Evaluating the Interest-Rate Risk of Adjustable-Rate Mortgage Loans," Journal of Real Estate Research, American Real Estate Society, vol. 13(1), pages 77-94.
    2. Stephen F. Thode, 2000. "CMOs, Duration Risk and a New Mortgage," Journal of Real Estate Research, American Real Estate Society, vol. 19(1), pages 73-103.

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