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Journal articles on the topic 'Mortgage-backed securities - Valuation'

Author: Grafiati

Published: 4 June 2021

Last updated: 12 February 2022

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1

Manola, Ana, and Branko Urosevic. "Option-based valuation of mortgage-backed securities." Ekonomski anali 55, no. 186 (2010): 42–66. http://dx.doi.org/10.2298/eka1086042m.

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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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2

SCHWARTZ, EDUARDO S., and WALTER N. TOROUS. "Prepayment and the Valuation of Mortgage-Backed Securities." Journal of Finance 44, no. 2 (June 1989): 375–92. http://dx.doi.org/10.1111/j.1540-6261.1989.tb05062.x.

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3

Stanton, Richard. "Rational Prepayment and the Valuation of Mortgage-Backed Securities." Review of Financial Studies 8, no. 3 (July 1995): 677–708. http://dx.doi.org/10.1093/rfs/8.3.677.

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4

Longstaff, Francis A. "Borrower Credit and the Valuation of Mortgage-Backed Securities." Real Estate Economics 33, no. 4 (December 2005): 619–61. http://dx.doi.org/10.1111/j.1540-6229.2005.00133.x.

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5

Kolbe, Andreas, and Rudi Zagst. "Valuation of Mortgage-Backed Securities and Mortgage Derivatives: A Closed-Form Approximation." Applied Mathematical Finance 16, no. 5 (November 11, 2009): 401–27. http://dx.doi.org/10.1080/13504860902781419.

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6

Mcconnell, John J., and Manoj K. Singh. "Prepayments and the Valuation of Adjustable Rate Mortgage-Backed Securities." Journal of Fixed Income 1, no. 1 (June 30, 1991): 21–35. http://dx.doi.org/10.3905/jfi.1991.692344.

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7

Kariya, Takeaki, Fumiaki Ushiyama, and Stanley R. Pliska. "A three‐factor valuation model for mortgage‐backed securities (MBS)." Managerial Finance 37, no. 11 (September 27, 2011): 1068–87. http://dx.doi.org/10.1108/03074351111167947.

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8

Chernov, Mikhail, Brett R. Dunn, and Francis A. Longstaff. "Macroeconomic-Driven Prepayment Risk and the Valuation of Mortgage-Backed Securities." Review of Financial Studies 31, no. 3 (December 14, 2017): 1132–83. http://dx.doi.org/10.1093/rfs/hhx140.

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9

Jegadeesh, Narasimhan, and Xiongwei Ju. "A Non-Parametric Prepayment Model and Valuation of Mortgage-Backed Securities." Journal of Fixed Income 10, no. 1 (June 30, 2000): 50–67. http://dx.doi.org/10.3905/jfi.2000.319237.

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10

Tae, Hyeon-Wuk, Ung-Gi Seo, Bong-Gyu Jang, Jun Kim, Jong-Hyuk Roh, and Seryoong Ahn. "The Valuation of Pass-Through Mortgage-Backed Securities in Korean Market." Journal of Derivatives and Quantitative Studies 25, no. 3 (August 31, 2017): 305–37. http://dx.doi.org/10.1108/jdqs-03-2017-b0001.

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This paper introduces a basic model and an extended model to evaluate the pass-through mortgage-backed securities (MBS) recently issued by Korea Housing Finance Corporation. The basic model assumes that the processes of interest rates, prepayment rates, and option-adjusted spreads have simple forms, of which parameters can be easily estimated by the market data available today. This paper presents the pricing formula on the basic model and the demonstrations under the present market data. We also suggest an extended model, a new but complicated model for pricing pass-through MBS, in which the interest rates and prepayment rates follow stochastic processes, and the option-adjusted spread is decomposed into one from refinancing and the other from mortgage turnover. However, since this kind of pass-through MBS has been traded in Korean financial market only recently, the market parameters in the extended model are not able to be estimated properly. We, instead, develop the pricing formula under the extended model and present the process of estimation of the parameters of the model. The participants in Korean MBS market can price the pass-through MBS for now under the basic model with limited set of data available, and later, when the market data is accumulated enough to estimate the parameters properly, they can take advantage of the extended model.

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11

LaCour-Little, Michael, Yun W. Park, and Richard K. Green. "Parameter Stability and the Valuation of Mortgages and Mortgage-Backed Securities." Real Estate Economics 40, no. 1 (October 11, 2011): 23–63. http://dx.doi.org/10.1111/j.1540-6229.2011.00313.x.

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12

Caflisch, Russel, William Morokoff, and Art Owen. "Valuation of mortgage-backed securities using Brownian bridges to reduce effective dimension." Journal of Computational Finance 1, no. 1 (1997): 27–46. http://dx.doi.org/10.21314/jcf.1997.005.

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13

Zhou, Ti. "INDIFFERENCE VALUATION OF MORTGAGE-BACKED SECURITIES IN THE PRESENCE OF PREPAYMENT RISK." Mathematical Finance 20, no. 3 (June 7, 2010): 479–507. http://dx.doi.org/10.1111/j.1467-9965.2010.00407.x.

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14

Kim, Yongsik, Jeongbok Son, and Jane Yoo. "Valuation of Mortgage Backed Securities Using Finite Differential Method and Parallel Computation." Journal of the Korean Operations Research and Management Science Society 46, no. 3 (August 31, 2021): 9–34. http://dx.doi.org/10.7737/jkorms.2021.46.3.009.

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15

KOLBE, ANDREAS, and RUDI ZAGST. "A HYBRID-FORM MODEL FOR THE PREPAYMENT-RISK-NEUTRAL VALUATION OF MORTGAGE-BACKED SECURITIES." International Journal of Theoretical and Applied Finance 11, no. 06 (September 2008): 635–56. http://dx.doi.org/10.1142/s0219024908004968.

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In this paper we present a prepayment-risk-neutral valuation model for fixed-rate Mortgage-Backed Securities. Our model is based on intensity models as used in credit-risk modeling and extends existing models for individual mortgage contracts in a proportional hazard framework. The general economic environment is explicitly accounted for in the prepayment process by an additional factor which we fit to the quarterly GDP growth rate in the US. In our risk-neutral setting we account for both the fears of refinancing understatement and turnover overstatement which sometimes result in higher option-adjusted spreads (OAS) for premiums and discounts respectively. We apply our prepayment-risk-neutral pricing approach to a sample of generic 30yr GNMA MBS pass-throughs from 1996 to 2006. Our empirical results indicate that the GDP growth factor adds explanatory power to the model.

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16

Folpmers, Marco, and Peter de Rijke. "A mark-to-model approach to the valuation of Residential Mortgage Backed Securities." Journal of Asset Management 11, no. 1 (April 2010): 55–61. http://dx.doi.org/10.1057/jam.2009.26.

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17

Petersen, M. A., J. Mukuddem-Petersen, B. De Waal, M. C. Senosi, and S. Thomas. "Profit and Risk under Subprime Mortgage Securitization." Discrete Dynamics in Nature and Society 2011 (2011): 1–64. http://dx.doi.org/10.1155/2011/849342.

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We investigate the securitization of subprime residential mortgage loans into structured products such as subprime residential mortgage-backed securities (RMBSs) and collateralized debt obligations (CDOs). Our deliberations focus on profit and risk in a discrete-time framework as they are related to RMBSs and RMBS CDOs. In this regard, profit is known to be an important indicator of financial health. With regard to risk, we discuss credit (including counterparty and default), market (including interest rate, price, and liquidity), operational (including house appraisal, valuation, and compensation), tranching (including maturity mismatch and synthetic) and systemic (including maturity transformation) risks. Also, we consider certain aspects of Basel regulation when securitization is taken into account. The main hypothesis of this paper is that the SMC was mainly caused by the intricacy and design of subprime mortgage securitization that led to information (asymmetry, contagion, inefficiency, and loss) problems, valuation opaqueness and ineffective risk mitigation. The aforementioned hypothesis is verified in a theoretical- and numerical-quantitative context and is illustrated via several examples.

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18

Sugimura, Toru. "Valuation of Residential Mortgage-Backed Securities with Default Risk Using an Intensity-Based Approach." Asia-Pacific Financial Markets 11, no. 2 (June 2004): 185–214. http://dx.doi.org/10.1007/s10690-006-9009-6.

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19

Tahani, Nabil, and Xiaofei Li. "Pricing interest rate derivatives under stochastic volatility." Managerial Finance 37, no. 1 (January 31, 2011): 72–91. http://dx.doi.org/10.1108/03074351111092157.

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PurposeThe purpose of this paper is to derive semi‐closed‐form solutions to a wide variety of interest rate derivatives prices under stochastic volatility in affine‐term structure models.Design/methodology/approachThe paper first derives the Frobenius series solution to the cross‐moment generating function, and then inverts the related characteristic function using the Gauss‐Laguerre quadrature rule for the corresponding cumulative probabilities.FindingsThis paper values options on discount bonds, coupon bond options, swaptions, interest rate caps, floors, and collars, etc. The valuation approach suggested in this paper is found to be both accurate and fast and the approach compares favorably with some alternative methods in the literature.Research limitations/implicationsFuture research could extend the approach adopted in this paper to some non‐affine‐term structure models such as quadratic models.Practical implicationsThe valuation approach in this study can be used to price mortgage‐backed securities, asset‐backed securities and credit default swaps. The approach can also be used to value derivatives on other assets such as commodities. Finally, the approach in this paper is useful for the risk management of fixed‐income portfolios.Originality/valueThis paper utilizes a new approach to value many of the most commonly traded interest rate derivatives in a stochastic volatility framework.

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20

Ozeki, Takaaki, Yuji Umezawa, Akira Yamazaki, and Daisuke Yoshikawa. "Valuation of Residential Mortgage-Backed Securities with Proportional Hazard Model:Cumulant Expansion Approach to Pricing RMBS." Journal of Fixed Income 18, no. 4 (March 31, 2009): 62–77. http://dx.doi.org/10.3905/jfi.2009.18.4.062.

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21

YAMAZAKI, AKIRA. "ON VALUATION WITH STOCHASTIC PROPORTIONAL HAZARD MODELS IN FINANCE." International Journal of Theoretical and Applied Finance 16, no. 03 (May 2013): 1350017. http://dx.doi.org/10.1142/s0219024913500179.

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While the proportional hazard model is recognized to be statistically meaningful for analyzing and estimating financial event risks, the existing literature that analytically deals with the valuation problems is very limited. In this paper, adopting the proportional hazard model in continuous time setting, we provide an analytical treatment for the valuation problems. The derived formulas, which are based on the generalized Edgeworth expansion and give approximate solutions to the valuation problems, are widely useful for evaluating a variety of financial products such as corporate bonds, credit derivatives, mortgage-backed securities, saving accounts and time deposits. Furthermore, the formulas are applicable to the proportional hazard model having not only continuous processes (e.g., Gaussian, affine, and quadratic Gaussian processes) but also discontinuous processes (e.g., Lévy and time-changed Lévy processes) as stochastic covariates. Through numerical examples, it is demonstrated that very accurate values can be quickly obtained by the formulas such as a closed-form formula.

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22

Patron, Hilde, and William J. Smith. "Mark-to-market and its effects on community banking during the financial crisis." Journal of Financial Regulation and Compliance 23, no. 1 (February 9, 2015): 55–72. http://dx.doi.org/10.1108/jfrc-02-2014-0014.

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Purpose – The purpose of this paper is to study the impact of the relaxation of mark-to-market (MTM) standards on community banks’ share prices. Mark-to-market valuation of securities became increasingly common in the late 1990s and 2000s, as regulators sought to create more transparent and more current depictions of bank financial positions. However, MTM accounting may be sub-optimal in the presence of severe market frictions, such as those experienced during the financial crisis of the late 2000s. To comply with capital requirements associated with MTM accounting, banks of the late 2000s dramatically liquidated portfolios with potentially solvent assets in illiquid markets, taking huge losses. During the financial crisis, mortgage-backed securities held by banks began to plummet in value. Banks were forced to either liquidate these assets even though there were no buyers or dramatically reduce the values of their portfolios based on fire-sale prices. On a cash-flow basis, these securities had value, as many mortgages bundled in these securities continued to be paid on time; however, with markets frozen, market prices did not reflect this value. Design/methodology/approach – This study shows that, for a sample of 134 community banks, share prices increased after the MTM relaxation, even after accounting for a variety of other economic factors. Findings – This paper shows that, perhaps counterintuitively, the steps taken by the Financial Accounting Standards Board to relax MTM accounting standards may have acted as a stabilizing factor on the market price of community bank shares by allowing banks to selectively liquidate assets, boosting asset prices until uncertainty was resolved. Originality/value – This paper examines the impact of recent changes in accounting standards on the perceived risks associated with the banking sector. It specifically focuses attention on the impacts these changes had on community-based banks within the USA.

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23

Gaussel, Nicolas, and Julien Tamine. "Valuation of Mortgage Backed Securities: From Optimality to Reality." SSRN Electronic Journal, 2004. http://dx.doi.org/10.2139/ssrn.1634105.

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24

Dunn, Brett, and Mahyar Kargar. "Funding Liquidity and the Valuation of Mortgage-Backed Securities." SSRN Electronic Journal, 2021. http://dx.doi.org/10.2139/ssrn.3813212.

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25

Lou, Wujiang. "Valuation of Mortgage-Backed Securities: A Portfolio Credit Derivatives Approach." SSRN Electronic Journal, 2009. http://dx.doi.org/10.2139/ssrn.1369708.

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26

Kruger, Samuel, and Gonzalo Maturana. "Collateral Misreporting in the Residential Mortgage-Backed Security Market." Management Science, July 2, 2020. http://dx.doi.org/10.1287/mnsc.2019.3569.

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Securitized mortgage appraisals routinely target pre-specified valuations, 45% of purchase loan appraisals exactly equal purchase prices, and appraisals virtually never fall below purchase prices. As a result, appraisals exceed automated valuation model (AVM) valuations 60% of the time and are 5% higher than AVM valuations on average. High appraisals and indicators of appraisal targeting predict loan delinquency and residential mortgage-backed security (RMBS) losses and are priced at the loan level through higher interest rates, but have essentially no impact on RMBS pricing. Selection bias simulations and unfunded loan application appraisals indicate that high appraisals are intentional. The extent to which appraisals exceed AVM valuations varies across loan officers, mortgage brokers, and appraisers, and high appraisals are associated with more repeat business for appraisers, potentially incentivizing appraisers to inflate their appraisals. This paper was accepted by Tomasz Piskorski, finance.

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