AN INTENSITY-BASED APPROACH TO THE VALUATION OF MORTGAGE CONTRACTS AND COMPUTATION OF THE ENDOGENOUS MORTGAGE RATE

Yevgeny Goncharov ()
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Yevgeny Goncharov: Department of Mathematics, Florida State University, 202A Love Bldg, Tallahassee, FL 32303, USA

International Journal of Theoretical and Applied Finance (IJTAF), 2006, vol. 09, issue 06, 889-914

Abstract: This paper gives a general mortgage model subject to sub-optimal prepayment behavior of borrowers. The proposed classification of approaches to the option-based and mortgage-rate-based (MRB) specification is validated by the fact that these two approaches require different analytical and numerical tools. With the option-based specification of the prepayment intensity, our model is the first continuous-time model; this gives advantage in the numerical treatment of the model. We propose a new approach based on the MRB idea with the endogenous mortgage rate process. The mortgage rate process is defined and the existence of a solution is proven for the option-based specification of the prepayment process. A numerical procedure for finding the endogenous mortgage rate is proposed.

Keywords: Mortgage; option-based approach; prepayment; intensity; mortgage rate (search for similar items in EconPapers)
Date: 2006
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Citations: View citations in EconPapers (7)

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DOI: 10.1142/S0219024906003871

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