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An Empirical Investigation of the Contingent‐Claims Approach to Pricing Residential Mortgage Debt
Author(s) -
Giliberto S. Michael,
Ling David C.
Publication year - 1992
Publication title -
real estate economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.064
H-Index - 61
eISSN - 1540-6229
pISSN - 1080-8620
DOI - 10.1111/1540-6229.00589
Subject(s) - economics , debt , empirical research , actuarial science , econometrics , financial economics , finance , statistics , mathematics
Despite the growth of theoretical mortgage‐pricing research, few empirical tests have been published. The primary objective of this paper is to provide an empirical test of the contingent‐claims approach to pricing residential mortgages. This is accomplished by examining the differences between contract mortgage rates generated by the theoretical contingent‐claims model and corresponding actual rates observed for 121 consecutive months from January 1981 through January 1991. We find that the contingent‐claims model produces an unbiased prediction of changes in actual rates.