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Pricing Mortgage Insurance with Asymmetric Jump Risk and Default Risk: Evidence in the U.S. Housing Market

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  • Chia-Chien Chang
  • Wei-Yi Huang
  • So-De Shyu

Abstract

This study provides the valuation of mortgage insurance (MI) considering upward and downward jumps in housing prices, which display separate distributions and probabilities of occurrence, and the mortgage insurer’s default risk. The empirical results indicate that the asymmetric double exponential jump diffusion performs better than the log-normally distributed jump diffusion and the Black-Scholes model, generally used in previous literature, to fit the single-family mortgage national average of all home prices in the US. Finally, the sensitivity analysis shows that the MI premium is an increasing function of the normal volatility, the mean down-jump magnitudes, the shock frequency of the abnormal bad events, and the asset-liability structure of the mortgage insurer. In particular, the shock frequency of the abnormal bad events has the largest effect of all parameters on the MI premium. The asset-liability structure of the mortgage insurer and shock frequency of the abnormal bad events have a larger effect of all parameters on the default risk premium. Copyright Springer Science+Business Media, LLC 2012

Suggested Citation

  • Chia-Chien Chang & Wei-Yi Huang & So-De Shyu, 2012. "Pricing Mortgage Insurance with Asymmetric Jump Risk and Default Risk: Evidence in the U.S. Housing Market," The Journal of Real Estate Finance and Economics, Springer, vol. 45(4), pages 846-868, November.
    • Handle: RePEc:kap:jrefec:v:45:y:2012:i:4:p:846-868
    DOI: 10.1007/s11146-011-9307-2
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    References listed on IDEAS

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    Cited by:

    1. Chang-Chih Chen & Chia-Chien Chang, 2019. "How Big are the Ambiguity-Based Premiums on Mortgage Insurances?," The Journal of Real Estate Finance and Economics, Springer, vol. 58(1), pages 133-157, January.
    2. 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).
    3. Ephraim Matanda & Eriyoti Chikodza & Farai Kwenda, 2022. "Fuzzy structural risk of default for banks in Southern Africa," Cogent Economics & Finance, Taylor & Francis Journals, vol. 10(1), pages 2141884-214, December.
    4. Dag Einar Sommervoll & Jan de Haan, 2014. "Homes and Castles: Should We Care about Idiosyncratic Risk?," Land Economics, University of Wisconsin Press, vol. 90(4), pages 700-716.
    5. Chia-Chien Chang & Min-Teh Yu, 2017. "Valuing Vulnerable Mortgage Insurance Under Capital Forbearance," The Journal of Real Estate Finance and Economics, Springer, vol. 54(4), pages 558-578, May.
    6. Meng, Qingbin & Huang, Haozheng & Li, Xinyu & Wang, Song, 2023. "Short-selling and corporate default risk: Evidence from China," International Review of Economics & Finance, Elsevier, vol. 87(C), pages 398-417.
    7. Chang, Chia-Chien, 2014. "Valuation Of Mortgage Insurance Contracts With Counterparty Default Risk: Reduced-Form Approach," ASTIN Bulletin, Cambridge University Press, vol. 44(2), pages 303-334, May.
    8. Yang, Chih-Yuan & Chang, Chia-Chien, 2024. "Do economic uncertainty and persistence in housing prices matter on mortgage insurance?," The Quarterly Review of Economics and Finance, Elsevier, vol. 95(C), pages 33-44.

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    More about this item

    Keywords

    Mortgage insurance contract; Asymmetric double exponential jump diffusion process; Default risk; G1; G2;
    All these keywords.

    JEL classification:

    • G1 - Financial Economics - - General Financial Markets
    • G2 - Financial Economics - - Financial Institutions and Services

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