The Empirical Study On Pricing Of Mortgage-backed Securities In China

Mortgage-backed securities are one of the most important financialinnovations in the field of international finance from last century betweenthe sixties and seventies. China also began to issue residentialmortgage-backed securities pilot work-launched the “Jianyuan2005-1”MBS since the end of2005. Although MBS pricing has beenrelatively mature theory abroad, but in terms of mortgage interest ratesand other features, our MBS and abroad are significantly different, whichmakes using foreign theories directly becomes infeasible. In addition, thedomestic system research for MBS is not a lot, and targeted research onprepayment model is relatively scarce. Therefore, it is necessary to have a“Chinese” style in-depth study for MBS pricing.This paper relies on the actual situation of “Jianyuan2005-1” MBS,describes the issues related to mortgage-backed securities and calculatesthe basic statistical data indicators of the “Jianyuan2005-1”MBS, andthen lay emphasis on analizing prepayment models. Finally this papercarefully selects the pricing model and interest rate path model so as totake preliminary exploration to the “Jianyuan2005-1” MBS pricing.On the basis of92“Jianyuan2005-1” trustee reports, the paper sortsout reimbursement situations periodically in different grades, and layemphasis on the actual prepayment rates,grading coupon rate, thebenchmark interest rates and other statistical indicators in the calculationof the basic statistical indexes. In the research of prepayment model, thispaper summarizes research results of factors affecting the prepaymentbehavior at home and abroad in different classifications, and uses theimproved Davis model to simulate and estimate after comparing theactual effects among models of hazard ratio, OTS and etc. Finally thispaper chooses option-adjusted spread method and CIR interest rate path model to achieve MBS pricing with the application of Monte-Carlosimulation.The study results show that Davis (2004) model is more suitable forprepayment rate analysis in China with the characteristics of a floatingrate mortgage. Moreover, the explanatory power of the model increasedby nearly20%by adding autoregressive term into Davis (2004) model.Revised CIR interest rate term structure model with the consideration ofthe actual situations in China has relatively better effect of interest ratesimulation. Option adjusted spread method not only takes changes ininterest rates for each period into account, but also reflecting differentinterest rate paths. Therefore it is a quite good choice seen either from theformal dimension or from the terms of the accuracy of the actual pricing.