Research On Pricing Method Of Mortgage Backed Securities In China

Mortgage backed securitization dates back to 1970s in the US. It is the process in which securities are issued by the back of the continuous future cash flow from a pool of mortgage loans. It is a very matured structure financing approach and is widely applied on the global capital market.Mortgage backed securitization is in its enfant period in China. So far there have been two MBS products issued and traded on the bond inter bank market. Of the two products, Jianyuan 2005-1 is the first MBS product and has been lasted for 25 terms so far.Pricing approach and result is of critical importance to the success of the issuance and trade of MBS. The characteristic that debtor can prepay the principal and interest leads to the instability of the future cash flow of the loan pool, thereafter makes the pricing even more difficult.The article applies both qualitative and quantitative methods to analyze the mortgage backed securitization in China, with the purpose of developing the appropriate prepayment and pricing models. Apart from the theoretical research, the article applies the logistic model in the empirical research for prepayment model. Based on the model concluded from the above analysis, the article prices Juanyuan 2005-1 mortgage backed security product.While we are taking the success model from the foreign countries, we should in the meantime learn from the failure as well. The Sub-prime mortgage crisis is the very instance that China can refer to. Based on the investigation into the cause and the mechanism of the crisis, the paper gives several suggestions in regards of the pricing of mortgage backed securitization.