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
- 10.2307/2328595
- Volume
- 44
- Issue
- 2
- Pages
- 375
- Sources
- openalex crossref