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Pricing various types of mortgage insurances with disposal and discount costs under a mean-reverting Lévy housing price process

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  • Gong, Xiaoye
  • Li, Ying
  • Wu, Yang-Che
  • Yang, Wan-Shiou

Abstract

This paper studies various types of mortgage insurance contract which show different series of mortgage cash flow. The valuations of such contracts are expressed by analytical pricing formulas with the disposal cost and price discount incurred in repossessing and selling collaterals. The dynamics of housing price is assumed to follow a mean-reverting Lévy process. Sensitivity analysis shows that initial housing price and coverage rate, mean-reverting rate, and characteristics of individual housing price all play important roles in valuing MI contracts. Two actual costs increase the premium of MI contracts.

Suggested Citation

  • Gong, Xiaoye & Li, Ying & Wu, Yang-Che & Yang, Wan-Shiou, 2020. "Pricing various types of mortgage insurances with disposal and discount costs under a mean-reverting Lévy housing price process," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 551(C).
    • Handle: RePEc:eee:phsmap:v:551:y:2020:i:c:s0378437120302648
    DOI: 10.1016/j.physa.2020.124561
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    More about this item

    Keywords

    Mortgage insurance; Moral hazard risk; Disposal cost; Mean-reverting process; Lévy process;
    All these keywords.

    JEL classification:

    • C46 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics - - - Specific Distributions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G22 - Financial Economics - - Financial Institutions and Services - - - Insurance; Insurance Companies; Actuarial Studies

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