Valuation of Mortgage-Backed Securities and Mortgage Derivatives: A Closed-Form Approximation

Andreas Kolbe and Rudi Zagst

Applied Mathematical Finance, 2009, vol. 16, issue 5, 401-427

Abstract: In this paper we develop a closed-form and thus computationally highly efficient formula to approximate the value of fixed-rate mortgage-backed securities (MBS). Our modelling framework is based on reduced-form and prepayment-risk-neutral valuation techniques and offers two major extensions compared with existing closed-form approximation approaches: we include a stochastic baseline prepayment factor in our model and we are able to capture the usual S-shaped curve of the refinancing incentive by a piecewise linear approximation. We apply our model to GNMA pass-through securities and test it on a 10-year sample of monthly GNMA MBS market prices for a wide range of coupons.

Keywords: Mortgage-backed security; prepayment; closed-form; risk-neutral pricing (search for similar items in EconPapers)
Date: 2009
References: View complete reference list from CitEc
Citations: View citations in EconPapers (1)

Downloads: (external link)
http://www.tandfonline.com/doi/abs/10.1080/13504860902781419 (text/html)
Access to full text is restricted to subscribers.

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:taf:apmtfi:v:16:y:2009:i:5:p:401-427

Ordering information: This journal article can be ordered from
http://www.tandfonline.com/pricing/journal/RAMF20

DOI: 10.1080/13504860902781419

Access Statistics for this article

Applied Mathematical Finance is currently edited by Professor Ben Hambly and Christoph Reisinger

More articles in Applied Mathematical Finance from Taylor & Francis Journals
Bibliographic data for series maintained by Chris Longhurst ().