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Ekonomski Anali
Article . 2010 . Peer-reviewed
License: CC BY NC ND
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Ekonomski Anali
Article
License: CC BY NC ND
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Ekonomski Anali
Article . 2010
Data sources: DOAJ
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Option-based valuation of mortgage-backed securities

Authors: Ana Manola; Branko Uroševic;

Option-based valuation of mortgage-backed securities

Abstract

Pure econometric approaches to pricing mortgage-backed securities (MBSs) - principal pricing vehicles used by financial practitioners - fail to capture their true risks. This point was powerfully driven home by the global financial crisis. Since prior to the crisis default rates of MBSs were quite modest, econometric pricing models systematically underestimated the possibility of default. As a result, MBSs were severely overvalued. It is widely believed that the global crisis was largely triggered by incorrect valuation of mortgage-backed securities. In the aftermath, it is important to revisit the foundations for pricing MBSs and to pay much closer attention to default risk. This paper introduces a comprehensive model for valuation of fixed-rate pass-through mortgagebacked securities in a simple option-based framework. In the model, we use bivariate binomial tree approach to simultaneously model prepayment and default options. Our simulation results demonstrate that the proposed model has sufficient flexibility to capture the two principal risks.

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Keywords

prepayment, Economic growth, development, planning, bivariate binomial pricing technique, mortgage-backed security(MBS), HD72-88, mortgage-backed security (MBS), prepayment, default, bivariate binomial pricing technique, default, jel: jel:C60, jel: jel:C02, jel: jel:G12, jel: jel:G10, jel: jel:G21

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selected citations
These citations are derived from selected sources.
This is an alternative to the "Influence" indicator, which also reflects the overall/total impact of an article in the research community at large, based on the underlying citation network (diachronically).
BIP!Citations provided by BIP!
popularity
This indicator reflects the "current" impact/attention (the "hype") of an article in the research community at large, based on the underlying citation network.
BIP!Popularity provided by BIP!
influence
This indicator reflects the overall/total impact of an article in the research community at large, based on the underlying citation network (diachronically).
BIP!Influence provided by BIP!
impulse
This indicator reflects the initial momentum of an article directly after its publication, based on the underlying citation network.
BIP!Impulse provided by BIP!
1
Average
Average
Average
Published in a Diamond OA journal