AN OPTION-THEORETIC PREPAYMENT MODEL FOR MORTGAGES AND MORTGAGE-BACKED SECURITIES

Andrew Kalotay (), Deane Yang () and Frank Fabozzi ()
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Andrew Kalotay: Andrew Kalotay Associates, Inc, 61 Broadway, Suite 1400, New York, NY 10006, USA
Deane Yang: Polytechnic University, Brooklyn, New York 11201, USA

International Journal of Theoretical and Applied Finance (IJTAF), 2004, vol. 07, issue 08, 949-978

Abstract: We introduce a new approach for modeling the prepayments of a mortgage pool and show how it can be used to value mortgage pools and agency mortgage-backed securities. We describe the full spectrum of refinancing behavior using a notion of refinancing efficiency. Our approach has two distinguishing features: (1) our primary focus is on understanding the market value of a mortgage, in contrast with standard models that strive (often unsuccessfully) to predict future cash flows, and (2) we use two separate yield curves, one for modeling mortgage cash flows and the other for MBS cash flows.

Keywords: Mortgage; prepayment model; mortgage-backed security; contingent claim; option; refinancing (search for similar items in EconPapers)
Date: 2004
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Citations: View citations in EconPapers (19)

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DOI: 10.1142/S0219024904002785

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