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Endogenous current coupons

Author

Listed:
  • Zhe Cheng

    (Morgan Stanley)

  • Scott Robertson

    (Boston University)

Abstract

We consider the problem of identifying current coupons for agency-backed to-be-announced pools of residential mortgages. Such coupons, or mortgage origination rates, ensure par-valued pools. In a doubly stochastic reduced form model which allows prepayment intensities to depend upon both current and origination mortgage rates, as well as underlying investment factors, we identify the current coupon as a solution to a degenerate elliptic, nonlinear fixed point problem. Using Schaefer’s theorem, we prove existence of a current coupon. We also provide an explicit approximation to the fixed point, valid for compact perturbations off a baseline factor-based intensity model. A numerical example is provided which shows that the approximation performs well in estimating the current coupon.

Suggested Citation

  • Zhe Cheng & Scott Robertson, 2017. "Endogenous current coupons," Finance and Stochastics, Springer, vol. 21(4), pages 1027-1071, October.
    • Handle: RePEc:spr:finsto:v:21:y:2017:i:4:d:10.1007_s00780-017-0340-8
    DOI: 10.1007/s00780-017-0340-8
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    References listed on IDEAS

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    1. Andrew Kalotay & Deane Yang & Frank J. Fabozzi, 2004. "An Option-Theoretic Prepayment Model For Mortgages And Mortgage-Backed Securities," International Journal of Theoretical and Applied Finance (IJTAF), World Scientific Publishing Co. Pte. Ltd., vol. 7(08), pages 949-978.
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    More about this item

    Keywords

    Mortgage backed securities; Current coupons; Fixed points;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • R31 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Real Estate Markets, Spatial Production Analysis, and Firm Location - - - Housing Supply and Markets

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