Prepayment Risk in Adjustable Rate Mortgages: Some New Evidence
California State University at Fullerton
Brent W. Ambrose
Pennsylvania State University
December 14, 1999
OLIN Working Paper No. 99-03
This paper empirically examines several open questions regarding prepayment risk in adjustable rate mortgages (ARMs), using loan-level data. Results support the teaser rate and adjustment date effects implied by the theoretical option pricing model of Kau, Keenan, Epperson and Muller (1993). In addition, we find that deeply teased ARMs do have greater prepayment risk, contrary to the results of Green and Shilling (1997).
JEL Classification: G21
Date posted: July 11, 2000
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