Author(s)

Y. Goncharov

Abstract

Using risk-neutral martingale methods together with the intensity-based approach, this paper develops a framework that not only generalizes but considerably extends the option-based approach.We formalize this approach and propose a new variant which promises a better performance. In particular, estimated transaction costs should be closer to those observed on the market. Our general model is not tied to a particular numerical procedure as are option-based mortgage models in the literature. As an example we show that classical Stanton’s model [9] is in fact a variant of a splitting-up, numerical method of the first order applied to our model. Keywords: mortgage, option-based approach, prepayment intensity. 1 Introduction The prepayment option is what makes mortgage related securities complicated assets to price. This right has a dramati

Keywords