Journal article
A stochastic partial differential equation model for the pricing of mortgage-backed securities
- Abstract:
- We develop a dynamic structural model for the wealth of individual mortgagors in a mortgage pool. We model the process of default and prepayment and, by taking a limit as the pool size goes to infinity, derive a stochastic partial differential equation (SPDE) which can be used to describe the evolution of the loss process from the pool. We prove existence and uniqueness of solutions to this SPDE and show how our model is able to capture, in a flexible way, the prices of credit risky tranches of mortgage-backed securities under different market conditions.
- Publication status:
- Published
- Peer review status:
- Peer reviewed
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- Files:
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(Preview, Accepted manuscript, pdf, 621.5KB, Terms of use)
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- Publisher copy:
- 10.1016/j.spa.2017.12.002
Authors
- Publisher:
- Elsevier
- Journal:
- Stochastic Processes and their Applications More from this journal
- Volume:
- 128
- Issue:
- 11
- Pages:
- 3778-3806
- Publication date:
- 2018-01-09
- Acceptance date:
- 2017-12-23
- DOI:
- EISSN:
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1879-209X
- ISSN:
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0304-4149
- Keywords:
- Pubs id:
-
pubs:815859
- UUID:
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uuid:a1ef9423-c427-4c2a-95a4-ed65ba3180d4
- Local pid:
-
pubs:815859
- Source identifiers:
-
815859
- Deposit date:
-
2018-01-08
Terms of use
- Copyright holder:
- Elsevier BV
- Copyright date:
- 2018
- Notes:
- Copyright © 2018 Elsevier B.V. This is the accepted manuscript version of the article. The final version is available online from Elsevier at: https://doi.org/10.1016/j.spa.2017.12.002
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