Pricing Mortgage Pass-through Securities by Simulation
Date Issued
2004
Date
2004
Author(s)
Yu, Ping-Lin
DOI
en-US
Abstract
When valuing a mortgage pass-through security, one must go back to the valuation of its underlying asset, a pool of risky mortgages, since it is mortgage borrowers who decide the timing of cash flows received by securities holders. Embedded options in mortgage contracts and mortgage borrowers’ suboptimal behavior make pass-through securities American-style and path-dependent. In this study, we use the Least Squares Monte Carlo method (LSM) proposed by Longstaff and Schwartz (2001) to value pass-through securities with such features. Incidentally, employing LSM reduces McConnell and Singh’s (1994) two-step framework into a one-step model. Furthermore, the model is extended to a two-factor model, in which both prepayment and default are considered so that pass-through securities and mortgage insurance can be priced at the same time. Finally, we provide not only our valuation results but several sensitivity analyses to determine the robustness of our algorithm.
Subjects
蒙地卡羅模擬法
房貸轉付證券
mortgage pass-through security
Monte Carlo Simulation
Type
thesis
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ntu-93-R91724041-1.pdf
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