Endogenous current coupons

Zhe Cheng () and Scott Robertson ()
Additional contact information
Zhe Cheng: Morgan Stanley
Scott Robertson: Boston University

Finance and Stochastics, 2017, vol. 21, issue 4, No 5, 1027-1071

Abstract: Abstract We consider the problem of identifying current coupons for agency-backed to-be-announced pools of residential mortgages. Such coupons, or mortgage origination rates, ensure par-valued pools. In a doubly stochastic reduced form model which allows prepayment intensities to depend upon both current and origination mortgage rates, as well as underlying investment factors, we identify the current coupon as a solution to a degenerate elliptic, nonlinear fixed point problem. Using Schaefer’s theorem, we prove existence of a current coupon. We also provide an explicit approximation to the fixed point, valid for compact perturbations off a baseline factor-based intensity model. A numerical example is provided which shows that the approximation performs well in estimating the current coupon.

Keywords: Mortgage backed securities; Current coupons; Fixed points; 60H30; 91G60; 91G80; 91B70 (search for similar items in EconPapers)
JEL-codes: G21 R31 (search for similar items in EconPapers)
Date: 2017
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DOI: 10.1007/s00780-017-0340-8

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