A Lattice Approach to Pricing Fixed‐Rate Mortgages with Default and Prepayment Options

Wai K. Leung, C. F. Sirmans

Research output: Journal PublicationArticlepeer-review

12 Citations (Scopus)

Abstract

Existing models on the pricing of default and prepayment options in fixed‐rate mortgages either use numerical methds or they do not consider refinancing or other transaction costs involved in default and prepayment. We provide in this paper an application of the Boyle lattice model to price secured debt with two risky assets. This model is simple, efficient and capable of considering the major types of transaction costs involved in prepayment and default. Using our model, we estimate the option values under a range of assumptions about the underlying parameters. We also provide some comparisons of the lattice model estimates to other models in the literature.

Original languageEnglish
Pages (from-to)91-104
Number of pages14
JournalReal Estate Economics
Volume18
Issue number1
DOIs
Publication statusPublished - Mar 1990
Externally publishedYes

ASJC Scopus subject areas

  • Accounting
  • Finance
  • Economics and Econometrics

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