Please use this identifier to cite or link to this item: http://scholarbank.nus.edu.sg/handle/10635/17023
Title: A contingent claim analysis of preferential rate mortgages
Authors: CHAI CHEE HIAN
Keywords: Option Pricing, Mortgages, Least Square Monte Carlo
Issue Date: 18-Apr-2005
Source: CHAI CHEE HIAN (2005-04-18). A contingent claim analysis of preferential rate mortgages. ScholarBank@NUS Repository.
Abstract: Preferential rate mortgages (PRMs), being hybrid class between fixed rate and adjustable rate mortgages, lacks a proper comparison framework. This paper attempts to develop a frictions-adjusted four-factor mortgage theoretic option based model (OPM) for this purpose. The problem with valuing such securities is that the path-dependent asset structure poses significant difficulty for backwards solving procedures. The solution, we present here, is a forward looking procedure, the Least Square Monte Carlo Simulation technique of Longstaff and Schwartz (2001) to estimate the default and prepayment options simultaneously. With this simulation technique, we further illustrate simple modifications to generate default and prepayment probability and severity distributions. Using this model, we provide an extensive sensitivity analysis of default and prepayment statistics with respect to different economic and contractual conditions, which would be of interest to mortgage originators and investors who seeks to understand the risk profile of mortgages and mortgage-backed securities.
URI: http://scholarbank.nus.edu.sg/handle/10635/17023
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