Can ARMs' mortgage servicing portfolios be delta-hedged under gamma constraints?

Carlos Ortiz (), Charles Stone () and Anne Zissu ()
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Carlos Ortiz: Arcadia University
Charles Stone: Brooklyn College, The City University of New York
Anne Zissu: Citytech, The City University of New York & POLY-NYU

Journal of Financial Transformation, 2010, vol. 28, 79-85

Abstract: Ortiz et al. [2008, 2009] develop models for portfolios of mortgage servicing rights (MSR) to be delta-hedged against interest rate risk. Their models rely on this fundamental relationship between prepayment rates (cpr) and interest rates, represented as a sigmoid function (S-shape). Defaults that lead to foreclosures or loan modifications on mortgages will either truncate or extend the stream of servicing income greeted by pools of adjustable rate mortgages. Ortiz et al.’s previous research focuses on mortgage services rights for fixed rate mortgages. In this paper we will extend their research to MSR for adjustable rate mortgages (ARMs).

Keywords: Adjustable rate mortgages; servicing; delta hedging; prepayment (search for similar items in EconPapers)
JEL-codes: G21 (search for similar items in EconPapers)
Date: 2010
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Persistent link: https://EconPapers.repec.org/RePEc:ris:jofitr:1410

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