Pricing Mortgage Insurance with Asymmetric Jump Risk and Default Risk: Evidence in the U.S. Housing Market

Chia-Chien Chang (), Wei-Yi Huang () and So- De Shyu ()

The Journal of Real Estate Finance and Economics, 2012, vol. 45, issue 4, 846-868

Abstract: This study provides the valuation of mortgage insurance (MI) considering upward and downward jumps in housing prices, which display separate distributions and probabilities of occurrence, and the mortgage insurer’s default risk. The empirical results indicate that the asymmetric double exponential jump diffusion performs better than the log-normally distributed jump diffusion and the Black-Scholes model, generally used in previous literature, to fit the single-family mortgage national average of all home prices in the US. Finally, the sensitivity analysis shows that the MI premium is an increasing function of the normal volatility, the mean down-jump magnitudes, the shock frequency of the abnormal bad events, and the asset-liability structure of the mortgage insurer. In particular, the shock frequency of the abnormal bad events has the largest effect of all parameters on the MI premium. The asset-liability structure of the mortgage insurer and shock frequency of the abnormal bad events have a larger effect of all parameters on the default risk premium. Copyright Springer Science+Business Media, LLC 2012

Keywords: Mortgage insurance contract; Asymmetric double exponential jump diffusion process; Default risk; G1; G2 (search for similar items in EconPapers)
Date: 2012
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Citations: View citations in EconPapers (8)

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DOI: 10.1007/s11146-011-9307-2

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