Computing the endogenous mortgage rate without iterations

Yevgeny Goncharov

Quantitative Finance, 2009, vol. 9, issue 4, 429-438

Abstract: A number of mortgage prepayment models require a specification of the mortgage rate process. Usually, ad-hoc models are used (e.g., a Treasury yield plus some constant). Recently, a number of papers have appeared where the authors have utilized a mortgage rate implied by the current yield curve (the so-called endogenous mortgage rate). However, the existing computational algorithms suffer from the curse of dimensionality and, consequently, are problematic to use for full-scale problems. A computational algorithm, proposed in this paper, is tractable in the sense that its complexity is equivalent to the problem of mortgage valuation. Moreover, the algorithm does not require iterations. The numerical example is based on a PDE computation. An implementation of a Monte Carlo method is also discussed.

Keywords: Financial mathematics; Numerical simulation; Mortgage backed securities; Multi-factor models (search for similar items in EconPapers)
Date: 2009
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Citations: View citations in EconPapers (2)

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DOI: 10.1080/14697680802609485

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