The Pricing Model Of RMBS In China

With the continuous development of mortgage market in China, the size of the mortgage is increasing quickly, especially the individual housing mortgage loans. The huge amount of loans brings pressure to the management of commercial banks and also increases its liquidity risk. As a result, the mortgage-backed securities (MBS) came into being. The issuance of Jianyuan2005-1individual housing mortgage backed securities indicated that the securitization of mortgages in China has formally been taken into the practice. Before MBS being issued, we must determine its price at first. Whether the MBS is priced reasonably or not is directly related to the success of its issuance and trading, and then will affect the subsequent development of asset securitization in China. At present, the method we use to price the MBS of China is just relatively simple and not complete, so it is necessary for us to study the method and model of the MBS pricing.The MBS pricing began earlier in foreign countries and has now established a more comprehensive and complete theoretical system. However, due to differences in factors, such as the financial market condition, cultural traditions and consumer psychological, our MBS pricing can not copy the foreign pricing model. In addition, the mortgage business in China started late, and mortgage borrowers personal information, prepayment rates and other data required in pricing are lacked, so in China MBS pricing based on the empirical analysis is not feasible. To establish the MBS pricing model according to China’s national conditions is the starting point for the research in this article.Firstly, the paper describes the systematic research of domestic and foreign scholars on the MBS pricing methods.Considering the actual situation in China and through a comparative analysis, it is reasonable to use the model based on option pricing theory price the mortgage-backed securities with implied prepayment option. Secondly, taking the reality of China’s interest rates that are not fully market-oriented into account, it uses stochastic interest rate model with fractional Brownian motion as the assumptions, and derive the partial differential equation satisfied by MBS prices. Finally, it take Jianyuan2007-1A individual housing mortgage-backed securities for the rationality of the study,and use the least squares Monte Carlo simulation method to obtain the numerical solution of its price so as to verify pricing model.According to the results of empirical analysis, it is viable and effective to price MBS with the option theory-based pricing model in China under the realistic conditions that there is not enough data about prepayment and default. The borrower’s prepayment behavior can be explained with the option theory of optimal prepayment strategy to some extent but not comprehensively. In order to price MBS more accurately, we should collect and improve the data of borrower’s behavior to establish appropriate models to explain the borrower non-optimal prepayment, and make the MBS pricing model more perfect.