PREPAYMENT RISK AND THE DURATION OF DEFAULT-FREE MORTGAGE-BACKED SECURITIES

Authors
ANDERSON GA BARBER JR CHANG CH
Citation
Ga. Anderson et al., PREPAYMENT RISK AND THE DURATION OF DEFAULT-FREE MORTGAGE-BACKED SECURITIES, The Journal of financial research, 16(1), 1993, pp. 1-9
Citations number
9
Journal title
The Journal of financial research → ACNP
ISSN journal
02702592
Volume
16
Issue
1
Year of publication
1993
Pages
1 - 9
Database
ISI
SICI code
0270-2592(1993)16:1<1:PRATDO>2.0.ZU;2-0
Abstract
The conventional duration measure for mortgage-backed pass-through sec urities assumes that the prepayment rate is invariant to changes in ma rket interest rates. In this paper, the conventional duration is modif ied to take into account the interest-rate sensitivity of mortgage pre payments. Including interest rate sensitivity is shown to reduce subst antially the duration of a mortgage-backed pass-through security when the current mortgage rate is less than the contract rate.