Open Yale CoursesECON 251: Financial TheoryLecture 18 - Modeling Mortgage Prepayments and Valuing Mortgages<< previous session | next session >>Overview:A mortgage involves making a promise, backing it with collateral, and defining a way to dissolve the promiseat prearranged terms in case you want to end it by prepaying. The option to prepay, the refinancing option,makes the mortgage much more complicated than a coupon bond, and therefore something that a hedge fundcould make money trading. In this lecture we discuss how to build and calibrate a model to forecastprepayments in order to value mortgages. Old fashioned economists still make non-contingent forecasts, likethe recent predictions that unemployment would peak at 8%. A model makes contingent forecasts. The old
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