Korean J. Math. Vol. 29 No. 2 (2021) pp.409-424
DOI: https://doi.org/10.11568/kjm.2021.29.2.409

A prepayment-risk-neutral pricing model for mortgage-backed securities

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Published: Jun 30, 2021
Keywords:
Morgage-Backed Securities, Prepayment, Call Option
Mathematics Subject Classification:
60G07

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Seryoong Ahn
Division of Business Administration, Pukyong National University, Republic of Korea
Wan Young Song
Housing Finance Research Institute, Korea Housing-Finance Corporation, Republic of Korea
Ji-Hun Yoon
Department of Mathematics, Pusan National University, Republic of Korea

Abstract

In this paper, we investigate a pricing model for mortgage-backed securities (MBSs) of a pay-through type of collateral mortgage obligation (CMO), embedded call options, which can be exercised by the intermediary, and pass-through MBSs. We suggest a prepayment-risk-neutral pricing model, applying a reduced-form prepayment rate model, and then compute and investigate the appropriate prices and spreads in the coupon rates between CMOs and PT MBSs. We believe that this study contributes in that it provides a sophisticated pricing model for MBSs, especially to the financial markets which are not advanced enough to finance with a simple type of MBSs.


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