RT Journal Article
SR Electronic
T1 Valuation of Residential Mortgage-Backed Securities with Proportional Hazard Model: <em>Cumulant Expansion Approach to Pricing RMBS</em>
JF The Journal of Fixed Income
FD Institutional Investor Journals
SP 62
OP 77
DO 10.3905/JFI.2009.18.4.062
VO 18
IS 4
A1 Takaaki Ozeki
A1 Yuji Umezawa
A1 Akira Yamazaki
A1 Daisuke Yoshikawa
YR 2009
UL https://pm-research.com/content/18/4/62.abstract
AB This paper proposes a pricing formula for residential mortgage-backed securities (RMBS) with the proportional hazard model. First, we develop basic models of mortgage contracts with prepayment risk in the intensity-based framework. Next, assuming the proportional hazard model to describe prepayment risk, which is used as a typical prepayment model both academically and in practice; a general pricing formula for not only RMBS, but also IO and PO is derived by using the cumulant expansion method. Furthermore, it is also shown that the formula is applicable to various types of the proportional hazard models. Finally, numerical examples based on Japanese RMBS market data demonstrate that the formula is very accurate and useful in practice.TOPICS: MBS and residential mortgage loans, credit risk management, big data/machine learning, developed markets [Japan]