TY - GEN
T1 - Closed-form mortgage pricing formula with outstanding principal as prepayment value
AU - Tsai, Yi Cheng
AU - Chen, Zheng Hui
AU - Ho, Jan Ming
AU - Kao, Ming-Yang
AU - Lei, Chin Laung
AU - Liao, Szu Lang
PY - 2012
Y1 - 2012
N2 - This study considers all the possible actions a borrower may have, i.e., to default, to prepay, and to maintain the mortgage, during mortgage horizon. Then, we provide an effective and accurate pricing formula, which not only considers the effect that default might affect the mortgage value, but also more accurately explores the impact due to prepayment risk. In our model, we define prepayment value of the mortgage as the amount of outstanding principle. In contrast, previous literature defines prepayment value as a constant proportion of maintaining value of the mortgage. Finally, based on closed-form pricing formula, we analyze the yield, duration and convexity of risky mortgage loan, providing a better framework for risk management.
AB - This study considers all the possible actions a borrower may have, i.e., to default, to prepay, and to maintain the mortgage, during mortgage horizon. Then, we provide an effective and accurate pricing formula, which not only considers the effect that default might affect the mortgage value, but also more accurately explores the impact due to prepayment risk. In our model, we define prepayment value of the mortgage as the amount of outstanding principle. In contrast, previous literature defines prepayment value as a constant proportion of maintaining value of the mortgage. Finally, based on closed-form pricing formula, we analyze the yield, duration and convexity of risky mortgage loan, providing a better framework for risk management.
UR - http://www.scopus.com/inward/record.url?scp=84869790948&partnerID=8YFLogxK
UR - http://www.scopus.com/inward/citedby.url?scp=84869790948&partnerID=8YFLogxK
U2 - 10.1109/CIFEr.2012.6327778
DO - 10.1109/CIFEr.2012.6327778
M3 - Conference contribution
AN - SCOPUS:84869790948
SN - 9781467318037
T3 - 2012 IEEE Conference on Computational Intelligence for Financial Engineering and Economics, CIFEr 2012 - Proceedings
SP - 100
EP - 106
BT - 2012 IEEE Conference on Computational Intelligence for Financial Engineering and Economics, CIFEr 2012 - Proceedings
T2 - 2012 IEEE Conference on Computational Intelligence for Financial Engineering and Economics, CIFEr 2012
Y2 - 29 March 2012 through 30 March 2012
ER -