Estimation of Housing Price Jump Risks and Their Impact on the Valuation of Mortgage Insurance Contracts

24 Pages Posted: 10 May 2010

See all articles by Ming-Chi Chen

Ming-Chi Chen

National Sun Yat-sen University - Department of Finance

Chia-Chien Chang

National Sun Yat-sen University - Department of Finance

Shih-Kuei Lin

affiliation not provided to SSRN

So-De Shyu

National Sun Yat-Sen University

Abstract

Housing price jump risk and the subprime crisis have drawn more attention to the precise estimation of mortgage insurance premiums. This study derives the pricing formula for mortgage insurance premiums by assuming that the housing price process follows the jump diffusion process, capturing important characteristics of abnormal shock events. This assumption is consistent with the empirical observation of the U.S. monthly national average new home returns from 1986 to 2008. Furthermore, we investigate the impact of price jump risk on mortgage insurance premiums from shock frequency of the abnormal events, abnormal mean and volatility of jump size, and normal volatility. Empirical results indicate that the abnormal volatility of jump size has the most significant impact on mortgage insurance premiums.

Suggested Citation

Chen, Ming-Chi and Chang, Chia-Chien and Lin, Shih-Kuei and Shyu, So-De, Estimation of Housing Price Jump Risks and Their Impact on the Valuation of Mortgage Insurance Contracts. Journal of Risk and Insurance, Vol. 77, Issue 2, pp. 399-422, June 2010, Available at SSRN: https://ssrn.com/abstract=1600998 or http://dx.doi.org/10.1111/j.1539-6975.2009.01326.x

Ming-Chi Chen (Contact Author)

National Sun Yat-sen University - Department of Finance ( email )

No.70, Lianhai Rd., Gushan District,
Kaohsiung City
Taiwan

HOME PAGE: http://cm.nsysu.edu.tw/~mcchen/index.html

Chia-Chien Chang

National Sun Yat-sen University - Department of Finance ( email )

No.70, Lianhai Rd., Gushan District,
Kaohsiung City
Taiwan

Shih-Kuei Lin

affiliation not provided to SSRN

So-De Shyu

National Sun Yat-Sen University ( email )

No.70, Lianhai Rd., Gushan District,
Kaohsiung City
Taiwan

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