Electronic Resource
Springer
The journal of real estate finance and economics
19 (1999), S. 133-146
ISSN:
1573-045X
Keywords:
mortgage valuation
;
closed form formula
;
MBS prepayment
Source:
Springer Online Journal Archives 1860-2000
Topics:
Economics
Notes:
Abstract We develop a closed form formula for the value of a fixed-rate residential mortgage that includes the provision that the borrower can prepay at any time with no penalty. The value of the mortgage equals the expectation, under the risk neutral probability measure, of the future cash flows. We model future cash flows by estimating an empirical model of prepayment behavior. A second change of measure leads to a closed form expression for the expectation. The closed form values explain most of the time series variation in MBS prices. The closed form formula significantly shortens the time to calculate mortgage values and durations and can be a useful tool for portfolio management and hedging.
Type of Medium:
Electronic Resource
URL:
http://dx.doi.org/10.1023/A:1007879422329
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