Efficient Valuation of Prepayment and Default Risky Securities

In this article, we will combine an econometric binary response model suitable for representing discrete time default and prepayment conditional probabilities with a valuation technique suitable for pricing path-dependent cash flows. The econometric model offers an analytically tractable mathematical form that we believe will be appreciated by practitioners. The pricing technique can efficiently value mortgage cash flows and other similar path-dependent instruments. The combination is particularly useful for products that must frequently be marked-to-market despite the valuation difficulties posed by their path dependence