The Valuation at Origination of Mortgages with Full Prepayment and Default Risks

Congjin Zhou (), Guojing Wang, Yinghui Dong and Pin Wang
Additional contact information
Congjin Zhou: Suzhou University of Science and Technology
Guojing Wang: Soochow University
Yinghui Dong: Suzhou University of Science and Technology
Pin Wang: Soochow University

Methodology and Computing in Applied Probability, 2024, vol. 26, issue 2, 1-26

Abstract: Abstract We investigate the valuation problem of a mortgage contract with full prepayment and default risks using the reduced-form model with regime switching. The hazard rates of full prepayment and default are specified as linear functions of the risk-free interest rate and house prices, respectively, which are characterized by Ornstein-Uhlenbeck processes with regime switching. To derive the explicit valuation formula, we derive the distribution of the number of transitions for two-state Markov processes in finite time and the conditional joint probability density function of transition times using the uniformization technique. Finally, we analyze the effect of parameters on the valuation of the mortgage.

Keywords: Valuation; Mortgage; Prepayment; Default; Regime switching; Uniformization; 60-08 (search for similar items in EconPapers)
Date: 2024
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
http://link.springer.com/10.1007/s11009-024-10081-2 Abstract (text/html)
Access to the full text of the articles in this series is restricted.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:spr:metcap:v:26:y:2024:i:2:d:10.1007_s11009-024-10081-2

Ordering information: This journal article can be ordered from
https://www.springer.com/journal/11009

DOI: 10.1007/s11009-024-10081-2

Access Statistics for this article

Methodology and Computing in Applied Probability is currently edited by Joseph Glaz

More articles in Methodology and Computing in Applied Probability from Springer
Bibliographic data for series maintained by Sonal Shukla () and Springer Nature Abstracting and Indexing ().