NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Pricing Mortgages: An Interpretation of the Models and Results

Patric H. Hendershott, Robert Van Order

NBER Working Paper No. 2290 (Also Reprint No. r1006)
Issued in June 1987
NBER Program(s):   ME

Mortgages, like all debt securities, can be viewed as risk-free assets plus or minus contingent claims that can be usefully viewed as options. The most important options are: prepayment, which is a call option giving the borrower the right to buy back the mortgage at par, and default, which is a put option giving the borrower the right to sell the house in exchange for the mortgage. This paper reviews and interprets the large and growing body of literature that applies recent results of option pricing models to mortgages. We also provide a critique of the models and suggest directions for future research.

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Document Object Identifier (DOI): 10.3386/w2290

Published: From Journal of Financial Services Research, Vol. 1, No. 1, pp. 19-55,(October 1987).

 
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