PRICING AND HEDGING PREPAYMENT RISK IN A MORTGAGE PORTFOLIO

EMANUELE CASAMASSIMA, LECH A. GRZELAK, FRANK A. MULDER, CORNELIS W. OOSTERLEE
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Abstract

Understanding mortgage prepayment is crucial for any financial institution providing mortgages, and it is important for hedging the risk resulting from such unexpected cash flows. Here, in the setting of a Dutch mortgage provider, we propose to include nonlinear financial instruments in the hedge portfolio when dealing with mortgages with the option to prepay part of the notional early. Based on the assumption that there is a correlation between prepayment and the interest rates in the market, a model is proposed which is based on a specific refinancing incentive. The linear and nonlinear risks are addressed by a set of tradeable instruments in a static hedge strategy. We will show that a stochastic model for the notional of a mortgage unveils nonlinear risk embedded in a prepayment option. Based on a calibration of the refinancing incentive on a data set of more than thirty million observations, a functional form of the prepayments is defined, which accurately reflects the borrowers’ behavior. We compare this functional form with a fully rational model, where the option to prepay is assumed to be exercised rationally.

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抵押贷款组合中提前还款风险的定价与对冲
了解抵押贷款提前还款对任何提供抵押贷款的金融机构来说都是至关重要的,对于对冲此类意外现金流带来的风险也很重要。在这里,在荷兰抵押贷款提供商的设置中,我们建议在处理具有提前支付部分名义提前选择权的抵押贷款时,将非线性金融工具纳入对冲投资组合。在假定提前还款与市场利率存在相关性的基础上,提出了一个基于特定再融资激励的模型。在静态对冲策略中,线性和非线性风险由一组可交易工具来解决。我们将展示抵押贷款概念的随机模型揭示了嵌入在提前支付选项中的非线性风险。基于对超过3000万次观察数据集的再融资激励的校准,定义了提前支付的函数形式,它准确地反映了借款人的行为。我们将这种函数形式与完全理性模型进行比较,在完全理性模型中,提前支付期权被假设为理性行使。
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来源期刊
CiteScore
1.10
自引率
20.00%
发文量
28
期刊介绍: The shift of the financial market towards the general use of advanced mathematical methods has led to the introduction of state-of-the-art quantitative tools into the world of finance. The International Journal of Theoretical and Applied Finance (IJTAF) brings together international experts involved in the mathematical modelling of financial instruments as well as the application of these models to global financial markets. The development of complex financial products has led to new challenges to the regulatory bodies. Financial instruments that have been designed to serve the needs of the mature capitals market need to be adapted for application in the emerging markets.
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