Journal of Finance Vol. 44 No. 2 1989
Prepayment and the Valuation of Mortgage‐Backed Securities
Abstract
This paper puts forward a valuation framework for mortgage‐backed securities. Rather than imposing an optimal, value‐minimizing call condition, we assume that at each point in time there exists a probability of prepaying; this conditional probability depends upon the prevailing state of the economy. To implement our valuation procedure, we use maximum‐likelihood techniques to estimate a prepayment function in light of recent aggregate GNMA prepayment experience. By integrating this empirical prepayment function into our valuation framework, we provide a complete model to value mortgage‐backed securities.
- DOI
- 10.1111/j.1540-6261.1989.tb05062.x
- Volume
- 44
- Issue
- 2
- Pages
- 375-392
- Language
- en
- Sources
- bibtex:phds-export.bib crossref openalex