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Option-Theoretic Prepayment Model for Mortgages: Fabozzi , Kalotay and Yang

A new approach for modeling the prepayments of a mortgage pool
shows how to value mortgage pools and agency mortgage-backed
securities. A notion of refinancing efficiency describes the
full spectrum of refinancing behavior.

The approach has two distinguishing features:

(1) The primary focus is on understanding the market value of a
mortgage, in contrast with standard models that strive (often
unsuccessfully) to predict future cash flows, and

(2) we use two separate yield curves, one for discounting mortgage
cash flows and the other for MBS cash flows.

An Option-Theoretic Prepayment Model for Mortgages and Mortgage-
Backed Securities

To appear in International Journal of Theoretical and Applied Finance
Dec 2004, jrg 7, nr 8, december 2004, pages 949-978.

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