Research On Factors Influencing The Price Of China’s Mortgage-backed Security

The Mortgage-Backed Securities experienced the full development in the developedcountries since it came out. In American, the outstanding and trade volume ofMortgage-Backed Securities was just blow Treasuries at the end of2007. Securitization is animportant aspect of financial reform since resumption and the authorities tend to routinizethe securitization. Mortgage-Backed Securities had advantage in producing liquidity,low-cost financing, reducing risk assets and asset-liability management over other financialproducts.The pricing of Mortgage-Backed Securities was complicated because of the uncertaintyof cash flow which taking by the prepayment. The factors which could influence the price ofMortgage-Backed Securities included Term Structure of Interest Rates, risk premium ofTreasuries which had same maturity, prepayment rate and default of the mortgage in pool ofassets. On the foundation of analyzing numerous pricing models, this article choiceOption-Adjusted Spread pricing model as the theoretical basis.Because of the designing principal repayment and prepayment, the book value and priceof Mortgage-Backed Securities step down which causing difficult in analyzing the influenceof factors directly, we choice Option-Adjusted Spread as the proxy variable ofMortgage-Backed Securities’ price. And this article used CIR model to describe the dynamicterm structure of interest rate, Monte Carlo method to simulate the interest rate paths, ARMAmodel to describe the prepayment behavior. Then we calculate the future cash flow ofMortgage-Backed securities, and the Option-Adjusted Spread by the option adjusted spreadpricing model. Finally, we analyzed the influence of risk premium of Treasuries which hadsame maturity, prepayment rate and default rate of the mortgage in pool of assets to theprices of Mortgage-Backed Securities by analyzing the influence of these factors to theOption-Adjusted Spread we calculated. We further explore the feasibility of developing theMortgage-Backed Securities and policy recommendations in China based on the analysis ofthe empirical results.