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Pricing mortgages: An interpretation of the models and results

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Abstract

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 article 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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Authors
  1. Patric H. Hendershott
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  2. Robert Van Order
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Additional information

The Ohio State University and the National Bureau of Economic Research

The Urban Institute University of California at Los Angeles

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Hendershott, P.H., Van Order, R. Pricing mortgages: An interpretation of the models and results. J Finan Serv Res 1, 19–55 (1987). https://doi.org/10.1007/BF00114081

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