Abstract

http://ssrn.com/abstract=1814185
 


 



Parameter Stability and the Valuation of Mortgages and Mortgage-Backed Securities


Michael LaCour-Little


California State University at Fullerton

Yun W. Park


Korea Securities Research Institute (KSRI)

Richard K. Green


University of Southern California - Lusk Center for Real Estate

April 18, 2011

Real Estate Economics, March 2012

Abstract:     
The recent financial crisis was triggered by large and unexpected losses on mortgages and mortgage-related securities. Here we examine model risk arising from innovations in mortgage markets and how those innovations affect asset values. In particular, we examine the effect of parameter instability in the prepayment function. Using carefully constructed micro-data, we find that the refinancing propensity was greater in 1998 for a 1997 issue given the same incentives, compared to the 1993 performance of a 1992 issue. The associated change in cash flow patterns produces economically significant changes in asset prices. Results are robust to alternative term structure models.

Keywords: mortgage, model risk, prepayment

Accepted Paper Series


Not Available For Download

Date posted: April 19, 2011  

Suggested Citation

LaCour-Little, Michael and Park, Yun W. and Green, Richard K., Parameter Stability and the Valuation of Mortgages and Mortgage-Backed Securities (April 18, 2011). Real Estate Economics, March 2012. Available at SSRN: http://ssrn.com/abstract=1814185

Contact Information

Michael LaCour-Little (Contact Author)
California State University at Fullerton ( email )
5133 Mihaylo Hall
Fullerton, CA 92834-6848
United States
657-278-4014 (Phone)
657-278-2161 (Fax)
Yun W. Park
Korea Securities Research Institute (KSRI) ( email )
33 Yoido-dong
Yongdeungpo-ku
Seoul, 786-7570
Korea, Republic of (South Korea)
Richard K. Green
University of Southern California - Lusk Center for Real Estate ( email )
Los Angeles, CA 90089
United States
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