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Implied prepayment in agency passing-through mortgage backed securities

Author

Listed:
  • Haimei Shao

    (Funds Management, BB&T Corporation, Winston-Salem, NC 27103, USA)

  • Jiongmin Yong

    (#x2020;Department of Mathematics, University of Central Florida, Orlando, FL 32816, USA)

Abstract

This paper studies the empirical facts of agency mortgage-backed securities price dynamics. Based on an explicit formula for MBS pricing developed in this paper, the prepayment rate can be implied from the market price. The standard structural form approach calculates the prices from the structure of prepayments. We reverse the problem, deriving the prepayment from the price. We find that the price change does not necessarily reflect the change of actual prepayment. The explicit formula and calibration strategies developed in this paper provide an alternative way to analyze and valuate the MBS.

Suggested Citation

  • Haimei Shao & Jiongmin Yong, 2017. "Implied prepayment in agency passing-through mortgage backed securities," International Journal of Financial Engineering (IJFE), World Scientific Publishing Co. Pte. Ltd., vol. 4(02n03), pages 1-16, June.
    • Handle: RePEc:wsi:ijfexx:v:04:y:2017:i:02n03:n:s2424786317500232
    DOI: 10.1142/S2424786317500232
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    3. Schwartz, Eduardo S & Torous, Walter N, 1992. "Prepayment, Default, and the Valuation of Mortgage Pass-through Securities," The Journal of Business, University of Chicago Press, vol. 65(2), pages 221-239, April.
    4. Dwight Jaffee, 2003. "The Interest Rate Risk of Fannie Mae and Freddie Mac," Journal of Financial Services Research, Springer;Western Finance Association, vol. 24(1), pages 5-29, August.
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