PREPAYMENT RISK AND THE DURATION OF DEFAULT‐FREE MORTGAGE‐BACKED SECURITIES

Gary A. Anderson, Joel R. Barber and Chun‐Hao Chang

Journal of Financial Research, 1993, vol. 16, issue 1, 1-9

Abstract: The conventional duration measure for mortgage‐backed pass‐through securities assumes that the prepayment rate is invariant to changes in market interest rates. In this paper, the conventional duration is modified to take into account the interest‐rate sensitivity of mortgage prepayments. Including interest rate sensitivity is shown to reduce substantially the duration of a mortgage‐backed pass‐through security when the current mortgage rate is less than the contract rate.

Date: 1993
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