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An Intensity-Based Approach To The Valuation Of Mortgage Contracts And Computation Of The Endogenous Mortgage Rate

Author

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  • YEVGENY GONCHAROV

    (Department of Mathematics, Florida State University, 202A Love Bldg, Tallahassee, FL 32303, USA)

Abstract

This paper gives a general mortgage model subject to sub-optimal prepayment behavior of borrowers. The proposed classification of approaches to the option-based and mortgage-rate-based (MRB) specification is validated by the fact that these two approaches require different analytical and numerical tools. With the option-based specification of the prepayment intensity, our model is the first continuous-time model; this gives advantage in the numerical treatment of the model. We propose a new approach based on the MRB idea with the endogenous mortgage rate process. The mortgage rate process is defined and the existence of a solution is proven for the option-based specification of the prepayment process. A numerical procedure for finding the endogenous mortgage rate is proposed.

Suggested Citation

  • Yevgeny Goncharov, 2006. "An Intensity-Based Approach To The Valuation Of Mortgage Contracts And Computation Of The Endogenous Mortgage Rate," International Journal of Theoretical and Applied Finance (IJTAF), World Scientific Publishing Co. Pte. Ltd., vol. 9(06), pages 889-914.
    • Handle: RePEc:wsi:ijtafx:v:09:y:2006:i:06:n:s0219024906003871
    DOI: 10.1142/S0219024906003871
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    Citations

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    Cited by:

    1. Matteo Bissiri & Riccardo Cogo, 2017. "Behavioral Value Adjustments," International Journal of Theoretical and Applied Finance (IJTAF), World Scientific Publishing Co. Pte. Ltd., vol. 20(08), pages 1-37, December.
    2. Mikhail Chernov & Brett R. Dunn & Francis A. Longstaff, 2018. "Macroeconomic-Driven Prepayment Risk and the Valuation of Mortgage-Backed Securities," The Review of Financial Studies, Society for Financial Studies, vol. 31(3), pages 1132-1183.
    3. Ahmad, F. & Hambly, B.M. & Ledger, S., 2018. "A stochastic partial differential equation model for the pricing of mortgage-backed securities," Stochastic Processes and their Applications, Elsevier, vol. 128(11), pages 3778-3806.
    4. Zhe Cheng & Scott Robertson, 2017. "Endogenous current coupons," Finance and Stochastics, Springer, vol. 21(4), pages 1027-1071, October.
    5. Dai, Min & Kwok, Yue Kuen & You, Hong, 2007. "Intensity-based framework and penalty formulation of optimal stopping problems," Journal of Economic Dynamics and Control, Elsevier, vol. 31(12), pages 3860-3880, December.
    6. Scott Robertson & Zhe Cheng, 2015. "Endogenous Current Coupons," Papers 1510.02010, arXiv.org.

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