This paper constructs a reduced-form credit risk model of mortgage default. The data used is of privately-securitized subprime ARMs (adjustable rate mortgages), originated between 1997 and 2008, and observed between 2000 and 2009. The period studied thus encompasses the beginning of the subprime...

This paper constructs a reduced-form credit risk model of mortgage default. The data used is of privately-securitized subprime ARMs (adjustable rate mortgages), originated between 1997 and 2008, and observed between 2000 and 2009. The period studied thus encompasses the beginning of the subprime...

Securities whose payoffs depend upon the actual path of the underlying state variables pose problems for standard backward-valuation techniques. In this paper, we show that there is a method of solving such problems that requires the addition of but a single auxiliary state variable. The...

Path dependent securities depend on current and past values of underlying state variables. Consequently, the usual backward evaluation technique is difficult to apply since state variable values existing earlier in real time are unknown. This paper develops a series of propositions which makes...

In this paper we develop a general method for valuing adjustable rate mortgages and by producing a set of simulation results, we show that our approach can be implemented. While the simulations are of interest in their own right, we view the approach itself as the major contribution of the...