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| Content Provider | Springer Nature Link |
|---|---|
| Author | De Rossi, Giulia Vargiolu, Tizia |
| Copyright Year | 2009 |
| Abstract | We study the optimal stopping problems embedded in a typical mortgage. Despite a possible non-rational behaviour of the typical borrower of a mortgage, such problems are worth to be solved for the lender to hedge against the prepayment risk, and because many mortgage-backed securities pricing models incorporate this suboptimality via a so-called prepayment function which can depend, at time t, on whether the prepayment is optimal or not. We state the prepayment problem in the context of the optimal stopping theory and present an algorithm to solve the problem via weak convergence of computationally simple trees. Numerical results in the case of the Vasicek model and of the CIR model are also presented. The procedure is extended to the case when both the prepayment as well as the default are possible: in this case, we present a new method of building two-dimensional computationally simple trees, and we apply it to the optimal stopping problem. |
| Starting Page | 23 |
| Ending Page | 47 |
| Page Count | 25 |
| File Format | |
| ISSN | 15938883 |
| Journal | Decisions in Economics and Finance |
| Volume Number | 33 |
| Issue Number | 1 |
| e-ISSN | 11296569 |
| Language | English |
| Publisher | Springer Milan |
| Publisher Date | 2009-10-31 |
| Publisher Place | Milan |
| Access Restriction | One Nation One Subscription (ONOS) |
| Subject Keyword | Computationally simple trees Hazard function Mortgage-backed securities Optimal stopping Two-dimensional trees Operations Research/Decision Theory Management/Business for Professionals Finance /Banking Public Finance & Economics Econometrics Economic Theory |
| Content Type | Text |
| Resource Type | Article |
| Subject | Finance |
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