Rational Model for Pricing Securities Issued by Securitizing Assets

Research Project

Project/Area Number	14530117
Research Category	Grant-in-Aid for Scientific Research (C)
Allocation Type	Single-year Grants
Section	一般
Research Field	Public finance/Monetary economics
Research Institution	Hosei University
Principal Investigator	KISHIMOTO Naoki Hosei University, Faculty of Business Administration, Professor, 経営学部, 教授 (50241766)
Project Period (FY)	2002 – 2003
Project Status	Completed (Fiscal Year 2003)
Budget Amount *help	¥1,600,000 (Direct Cost: ¥1,600,000) Fiscal Year 2003: ¥500,000 (Direct Cost: ¥500,000) Fiscal Year 2002: ¥1,100,000 (Direct Cost: ¥1,100,000)
Keywords	CMO / Securitization of assets / CDO / Option pricing model / Path dependent securities / Supplementary variables / 証券化 / MBS
Research Abstract	In general, securitization refers to the issuance of securities backed by a pool of assets, such as loans, leases, and accounts receivables (labeled "underlying assets"), where the cash flows from these assets are paid to the holders of the securities as either interests or principals. The major contribution of this study is to propose a rational model for pricing such securities where multiple types of securities are issued backed by a single pool of assets. The main feature of this valuation model is to explicitly account for variations in cash flow due to prepayments and defaults on the underlying assets. The prior studies valued securities issued by securitization by Monte Carlo simulation that is based on a function estimated on prepayment data. By contrast, this study first constructs a rational model for the asset holder's decision on prepayment and second lays out a framework for valuing securities issued by securitization based on the rational model for prepayments. This study shows that the proposed valuation method outperforms the prior method in computational complexity.