Adjustable and Fixed Rate Mortgages as a Screening Mechanism for Default Risk

2001 ◽  
Vol 49 (1) ◽  
pp. 54-79 ◽  
Author(s):  
Lisa L. Posey ◽  
Abdullah Yavas
Keyword(s):  
Default Risk ◽  
Fixed Rate

scholarly journals Credit Risk and Prepayment Option

1992 ◽  
Vol 22 (1) ◽  
pp. 81-96 ◽  
Author(s):  
Philippe Artzner ◽  
Freddy Delbaen
Keyword(s):  
Credit Risk ◽  
Default Risk ◽  
Corporate Bonds ◽  
Insurance Contract ◽  
Martingale Measure ◽  
Fixed Rate ◽  
Secondary Markets ◽  
Risk Neutral ◽  
Prepayment Option ◽  
Risk Insurance

AbstractThe paper examines a type of insurance contract for which secondary markets do exist: default risk insurance is implicit in corporate bonds and other risky debts. It applies risk neutral martingale measure pricing to evaluate the option for a borrower with default risk, to prepay a fixed rate loan. A simple “matchbox” example is presented with a spreadsheet treatment.

scholarly journals Option-based valuation of mortgage-backed securities

2010 ◽  
Vol 55 (186) ◽  
pp. 42-66 ◽  
Author(s):  
Ana Manola ◽  
Branko Urosevic
Keyword(s):  
Default Risk ◽  
Global Financial Crisis ◽  
Fixed Rate ◽  
Binomial Tree ◽  
Default Rates ◽  
Proposed Model ◽  
Mortgage Backed Securities ◽  
Prepayment And Default ◽  
Pass Through ◽  
The Global Financial Crisis

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.

Impact of Correlated Default Risk on Credit Portfolios

CFA Digest ◽  
2002 ◽  
Vol 32 (3) ◽  
pp. 97-98
Author(s):  
Stephen M Horan
Keyword(s):  
Default Risk
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