INTENSITY-BASED MODELS FOR PRICING MORTGAGE-BACKED SECURITIES WITH REPAYMENT RISK UNDER A CIR PROCESS

Sen Wu, Lishang Jiang and Jin Liang ()
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Sen Wu: Department of Mathematics, Tongji University, Shanghai 200092, P. R. China
Lishang Jiang: Department of Mathematics, Tongji University, Shanghai 200092, P. R. China
Jin Liang: Department of Mathematics, Tongji University, Shanghai 200092, P. R. China

International Journal of Theoretical and Applied Finance (IJTAF), 2012, vol. 15, issue 03, 1-17

Abstract: Under a reduced-form framework, we establish models for pricing mortgage-backed securities with prepayment risk by introducing a stochastic prepayment factor. In the zero-default scenario, the pricing pass-through securities and sequential-pay collateralized mortgage obligation structures are considered. To solve the problems, we introduce a path-dependent variable, from which partial differential equation problems are obtained when the prepayment rate is modeled by a CIR process. Numerical solution to the pricing problem is obtained by developing an explicit characteristics difference scheme.

Keywords: Prepayment; path-dependent; explicit characteristics difference (search for similar items in EconPapers)
Date: 2012
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DOI: 10.1142/S0219024912500215

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