Kariya, T., Ushiyama, F. and Pliska, S. R. (2002)
A 3-factor Valuation Model for Mortgage-Backed Securities (MBS)

abstract

In this paper we generalize the one-factor MBS-pricing model proposed by Kariya and Kobayashi(2000) to a 3-factor model. We describe prepayment behavior due to refinancing and rising housing prices by incentive responsefunctions. Our valuation of an MBS is based on discrete-time, no-arbitrage pricing theory, making an association between prepayment behavior and cash flow patterns. The structure, rationality, and potential for practical use of our model is demonstrated by valuing an MBS via Monte Carlo simulation and then conducting a comparative statics analysis.

   

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