Research On The Valuation Of Mortgage Backed Securities In China

The mortgage volume in China grew from 135.7 billion RMB in 1999 to 2270 billion RMB in 2006 and there had been an urgent need for Mortgage Backed Securities (MBS) among commercial banks. With the issurance of the first MBS in China, the following question would be: how to price the product.The paper started from the research background of MBS, including the situations in foreign countries. In the review of theories, the author made a detailed argument about discounted cash flow, econometric and other pricing methods. And in the first chapter, it came up with the clues and innovative points of the paper.Next, the paper introduced the basic concept and classification of mortgage. It analysed the characteristics and development of subprime mortgage in the U.S.A and compared that with the general mortgage in China. Based on this, the author looked deep into the house market and economic environment, which led to the prediction of potential risk in the mortgage market in China.Then, the paper worked on the prepayment and default risk of MBS. Prepayment risk was caculated by SMM, CPR, PSA and FHA standard. It was influenced by the seasonality, refinancing incentive, seasoning and burnout effect. There were rational and compelled default activities. And the default risk was calculated by PSA Standard Default Assumption. With regard to the prepayment and default activities of mortgage borrowers in China, the author analysed, compared and concluded the data from the commercial banks in Beijing, Shenzhen and Sichuan.One of the core issues of the paper was the pricing and experimental analysis of fixed rate mortgage backed securities. Within the framework of econometric model, the anthor labored on how to filter the factors of seasonality, refinancing incentive, seasoning and burnout by OLS method from the statistical data. Meanwhile, the author described how to establish default model with changed house price. Then, the author made experimental analysis of fixed rate mortgage backed securities.During the research of adjustable rate mortgage backed securities, the author introduced the differences from the fixed rate mortgage backed securities. The differences made prepayment and default activities of adjustable rate mortgage backed securities even more uncertain. Also, the author made experimental analysis of adjustable rate mortgage backed securities.Finally, the paper provided strategic suggestions in the aspects of internal control of commercial banks, external supervision, establishment of personal credit system, fulfillment of law framework and promotion of financial innovation.