Fair valuation of mortgage insurance under stochastic default and interest rates

Yang-Che Wu, Yi-Ting Huang, Shih-Kuei Lin and Ming-Che Chuang

The North American Journal of Economics and Finance, 2017, vol. 42, issue C, 433-447

Abstract: Unlike most studies in the literature, in this study, we incorporate three main factors into the pricing method of mortgage insurance: interest rate, housing price, and hazard rate (default risks). The empirical analysis highlighted that the interest rate and housing price are positively correlated during July 2004 to November 2016 because of the monetary policy over this period. Subsequently, in the risk-neutral pricing framework, mortgage insurance of the fixed-rate mortgage is priced using a Monte Carlo simulation approach. The sensitivity analysis indicated that interest rate, housing price, and default rate are important factors for mortgage insurance. Moreover, because our model can measure the risks of the interest rate and hazard rate, insurance companies can use this model to price mortgage insurance to avoid a condition in which the insurance company does not have sufficient reserves to support compensation.

Keywords: Mortgage insurance; Stochastic default rate; Loan-to-value (search for similar items in EconPapers)
JEL-codes: C22 C46 G01 G12 G21 (search for similar items in EconPapers)
Date: 2017
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecofin:v:42:y:2017:i:c:p:433-447

DOI: 10.1016/j.najef.2017.08.003

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