Not Available for Download

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

Real Estate Economics, March 2012

Posted: 19 Apr 2011  

Michael LaCour-Little

California State University at Fullerton; Federal National Mortgage Association (Fannie Mae)

Yun W. Park

Korea Securities Research Institute (KSRI)

Richard K. Green

University of Southern California - Lusk Center for Real Estate

Date Written: April 18, 2011

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

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: https://ssrn.com/abstract=1814185

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)

Federal National Mortgage Association (Fannie Mae) ( email )

3900 Wisconsin Avenue, NW
Washington, DC 20016-2892
United States
202-752-3318 (Phone)

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

Paper statistics

Abstract Views
380