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Rational Valuation Model for CMOs Under Real Estate Price and Interest Rate Uncertainty

Research Project

Project/Area Number 16530218
Research Category

Grant-in-Aid for Scientific Research (C)

Allocation TypeSingle-year Grants
Section一般
Research Field Public finance/Monetary economics
Research InstitutionHosei University

Principal Investigator

KISHIMOTO Naoki  Hosei University, Faculty of Business Administration, Professor, 経営学部, 教授 (50241766)

Project Period (FY) 2004 – 2005
Project Status Completed (Fiscal Year 2005)
Budget Amount *help
¥1,700,000 (Direct Cost: ¥1,700,000)
Fiscal Year 2005: ¥900,000 (Direct Cost: ¥900,000)
Fiscal Year 2004: ¥800,000 (Direct Cost: ¥800,000)
KeywordsSecuritization / CMO / MBS / RMBS / Option pricing
Research Abstract

The purpose of this research project is to build a rational valuation model for CMOs where both real estate prices and interest rates change stochastically.
After I started this project, I have realized that it is necessary to investigate in detail how real estate prices affect refinancing and default in order to build a more meaningful model. In the preceding literature on mortgage-backed securities that employ an option-theoretic framework, real estate prices affect MBS prices through default that occurs if the price of a real estate property underlying the loan in question falls below the principal of the mortgage loan. Yet, a close analysis of simulation results in Kau et al., "A Generalized Valuation Model for Fixed-Rate Residential Mortgages," Journal of Money, Credit, and Banking, 24(3),279-299, indicates that the total value of the mortgage and the accompanying insurance against default is insensitive to changes in real estate prices because the value of the insurance changes accordingly. Rather, the constraint that the mortgagor cannot refinance if the underlying real estate property value falls below a certain percentage of the mortgage principal may play a more significant role in refinancing of mortgage loans.
Therefore, this year I have examined some of the papers I had read last year focusing on the above point and gathered more papers to investigate this point. Based on this examination of the existing literature, I have devised new boundary conditions for refinancing to improve the CMO model that I have worked out last year.

Report

(3 results)
  • 2005 Annual Research Report   Final Research Report Summary
  • 2004 Annual Research Report

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Published: 2004-04-01   Modified: 2016-04-21  

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