Secondary mortgage market purchase commitment yields

Andrea J. Heuson, Adam Schwartz, V. Carlos Slawson

Research output: Contribution to journalArticle

Abstract

We provide empirical evidence that quoted secondary market mortgage yields conform to the predictions of option theory. We compare Fannie Mae and Freddie Mac origination yields offered in the secondary market from 1985 to 2003 with the predictions of a two-state binomial mortgage option valuation model. Our two-state approach considers a mean-reverting interest rate process as well as a stochastic housing price. Using predictions from option simulations, we find strong links between market practice and mortgage option prepayment and default factors over time. We also find cross-sectional differences that are consistent with the institutional structure of the markets.

Original languageEnglish (US)
Pages (from-to)593-608
Number of pages16
JournalJournal of Financial Research
Volume29
Issue number4
DOIs
StatePublished - Dec 1 2006

ASJC Scopus subject areas

  • Accounting
  • Finance

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