The Study Of Prepayment's Impact On Mortgage-Backed Security Pricing

As a financial innovation tool, the development of Mortgage-backed securities (MBS) plays a very important role for financial institutions, investors, borrowers and all society as a whole. During the development of MBS, reasonable pricing has always been the core issue, and the prepayment risk of MBS affects the final price of MBS significantly. As a result, this paper focuses on the discussion of prepayment risk and its impact on the pricing.Firstly, based on the actual prepayment data of "JianYuan 2005 MBS", this paper quantitatively analyzes the factors that affect the borrower's prepayment behavior and finds out that the major factors are interest rates and seasonal factors. It also provides the data support for the factors only according to experiences in the past. Secondly, when scholars studied how default and prepayment affected the pricing of MBS, they mostly used the proportion hazard model with the same baseline function. According to the different characteristics of default and prepayment, this paper adopts respectively the CIR process and Log-logistic distribution to build the proportion hazard models of default model and prepayment model, and to set up a reasonable default model and prepayment model. The paper solves the deficiencies between the result and the fact resulting from the same baseline function. Thirdly, based on the Kau-Keenan-Smurov intensity-based MBS pricing model (KKS model) and Monte Carlo simulation, the paper analyzes the changes of MBS value when the price of houses and interest rate of loans and the term of loans in the prepayment model are changed. In the prepayment model, when the other factors remain the same, MBS value is in direct ratio to interest rates. At the same time in order to guarantee the quality of credit assets and the value of MBS, personal house mortgage loans should be limited to the period of 30 years. Finally, the paper has made detailed comparisons between "JianYuan 2005" and "JianYuan 2007". They are two actual issued of MBS product. And the paper has analyzed their similarities and differences and the reasons of these differences. It concludes that comparing "JianYuan 2005", "JianYuan 2007" has improved in the design and development of pricing, tranches, prepayment assumptions and default. The paper has brought up reasonable suggestions about pricing, operation and development of MBS in the future.