Behavioral Value Adjustments for Mortgage Valuation

M. Bissiri and R. Cogo

Chapter 1 in Innovations in Insurance, Risk- and Asset Management:Proceedings of the Innovations in Insurance, Risk- and Asset Management Conference, 2018, pp 3-25 from World Scientific Publishing Co. Pte. Ltd.

Abstract: Behavioral risk affects the pricing of assets and liabilities with embedded pre-payment/extension options whenever the option holder does not act purely on the strength of financial convenience but follows an uncertain and sub-optimal exercise strategy, if seen from the viewpoint of the option seller. Such behavior is particularly relevant for mortgage valuation, since mortgage prepayments are clearly influenced by exogenous and individual factors besides financial reasons. In this paper we apply the general framework, proposed by Bissiri and Cogo, for modeling behavioral risk to the particular case of the valuation of a fixed-rate mortgage portfolio. We also extend the formulas by considering a pool of heterogeneous mortgagors, leading to the introduction of specific behavioral risk adjustments (βVA) in the pricing formulas.

Keywords: Insurance; Actuarial Science; Risk Measure; Reinsurance; Copula; Replicating Portfolio; Bayesian Finance; Risk Classification; Stochastic Dominance; Dynamic Hedging; Autoregressive Hidden Markov Models; Exchange-Traded Funds; Uncertainty Quantification; Fixed Income; Stochastic Processes for Finance (search for similar items in EconPapers)
JEL-codes: G22 G32 (search for similar items in EconPapers)
Date: 2018
References: Add references at CitEc
Citations:

Downloads: (external link)
https://www.worldscientific.com/doi/pdf/10.1142/9789813272569_0001 (application/pdf)
https://www.worldscientific.com/doi/abs/10.1142/9789813272569_0001 (text/html)
Ebook Access is available upon purchase.

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:wsi:wschap:9789813272569_0001

Ordering information: This item can be ordered from

Access Statistics for this chapter

More chapters in World Scientific Book Chapters from World Scientific Publishing Co. Pte. Ltd.
Bibliographic data for series maintained by Tai Tone Lim ().