Mortgage-Backed Futures and Options

This paper empirically tests valuation models for the mortgage-backed futures-options contracts that traded on the Chicago Board of Trade (CBOT) from June of 1989 until March of 1992. A simple contingent-claim model is shown to produce call option values on mortgage-backed futures (MBF) contracts that are unbiased estimates of actual futures-options prices. The ability of the MBF contract to hedge positions in current coupon Government National Mortgage Association (GNMA) securities relative to the effectiveness of cross-hedging GNMA positions with T-note and T-bond futures contracts is also examined.     

Hedging GNMA Mortgage-Backed Securities with T-Note Futures: Dynamic versus Static Hedging

This article proposes a dynamic hedging model for Government National Association Mortgage-Backed Securities (GNMA MBSs) that is free of the drawbacks associated with the static hedging strategies currently used. The simultaneity bias of the regression approach is dealt with by modeling the joint distribution of price changes of GNMA MBSs and 10-year Treasury-note futures. Error correction (EC) terms from cointegrating relationships are included in the conditional mean equations to preserve the long-term equilibrium relationship of the two markets. The time-varying variance–covariance structure of the two markets is modeled via a version of the bivariate generalized autoregressive conditionally heteroskedastic model (bivariate GARCH), which assures that the time-varying variance–covariance matrix is positive semidefinite for all time periods. This dynamic error-correction GARCH model is estimated using daily data on six different coupon GNMA MBSs. Dynamic cross-hedge ratios are obtained from the time-varying variance–covariance matrix using the 10-year Treasury-note futures contract as the hedging instrument. These ratios are evaluated in terms of both overall risk reduction and expected utility maximization. There is overwhelming evidence that dynamic hedge ratios are superior to static ones even when transaction costs are incorporated into the analysis. This conclusion holds for all six different coupon GNMA MBSs under investigation.     

Hedging Forward Mortgage Loan Commitments: The Option of Futures and a Future for Options

The purpose of this paper is to analyze theoretically the problem of how mortgage lending institutions assume the interest rate risks inherent in the granting of fixed-rate mortgage loan commitments.
Two approaches to hedge this risk are analyzed. First, the use of the GNMA futures market is evaluated from the standpoint of how it might be used to hedge against mortgage commitment risks. Secondly, the use of an appropriate pricing model—the Black-Scholes option pricing model—is offered as a proxy for establishing the market value of a fixed-rate mortgage commitment. This model is extended and empirically estimated for several hypothetical environments.
The paper demonstrates a basic flaw in the GNMA futures market as a hedge against mortgage commitments. Once this is established, the use of the options pricing approach is offered as a more rational approach for hedging these risks.     

An Arbitrage-Free Estimate of Prepayment Option Prices in Fixed-Rate GNMA Mortgage-Backed Securities

In an efficient market, the no-arbitrage condition implies that the price difference between any two assets must be the market value of all differences in their cash flows. We use this logic to deduce the price of the prepayment option embedded in fixed-rate Government National Mortgage Association (GNMA) mortgage-backed securities. The option price equals the difference between an observed GNMA price and the cost of a synthetic, nonprepayable GNMA constructed from the least expensive portfolio of Treasury securities that exactly replicates the promised GNMA cash flow stream, assuming prepayment is precluded. We regress the option prices on variables found significant in previous prepayment studies, finding that five key regressors explain more than 90% of the prepayment option value in pooled time-series cross-sectional analysis. We also show that the time value of the prepayment option calculated by our method displays a pattern similar to that produced by the Black-Scholes (1973) option pricing model. An additional empirical result is the existence of negative option prices and negative time value of the option prices. We attribute these to the fact that homeowners sometimes exercise their prepayment options when they are out-of-the-money, and to refinancing transaction costs. Our method is independent of assumptions regarding interest rate processes and the homeowner's prepayment behavior, and it provides a benchmark for testing theoretical prepayment models.     

上海燃料油期货市场运行效率实证研究

应用协整检验、Granger因果检验、套保比率计算和套保绩效检验等方法,对上海燃料油期货与现货的长期相关关系以及价格发现和套期保值功能的发挥情况进行了定量研究。结果表明,上海燃料油期货与黄埔现货之间具有长期均衡关系,二者之间是相互引导的;上海燃料油期货市场具有良好的价格发现和套期保值功能,可以为企业利用期货市场进行套期保值规避风险提供有效的支持。     

基于焦炭期货的最优套期保值比率的确定及应用

在比较传统套期保值理论与数学模型确定的最优套期保值比率的基础上,以山西焦炭类企业为例,指导企业如何运用焦炭期货确定其保值头寸,为企业提供一种简单、实用的风险管理思路。     

Hedging House Price Risk in China

The increasing risk associated with China's housing prices is globally recognized. However, hedging this risk is challenging because of a lack of financial derivatives on China's housing assets. We suggest that the short sale of futures contracts for construction raw materials, i.e., iron ore or/and steel, can act as useful tools to hedge the systematic risk of China's new home price. We first present evidence that there is a strong and stable correlation between changes in China's housing prices and global steel/iron ore prices. Using a hedging strategy model, we then show that, during the sample period between 2009 and 2015, 20.6% of the total unpredicted variance in Chinese housing prices can be hedged by shorting rebar and iron ore futures. We further examine this strategy with an event study based on the announcement of the “home‐purchase restriction” policy in April, 2010. The cumulative abnormal returns show that both steel and iron ore prices reacted significantly to this negative shock, and therefore the proposed strategy could substantially help investors offset losses in the housing market. We finally provide some evidences that this strategy can also help investors in specific regional housing markets, or the resale housing markets.     

中国上海燃料油期货定价模型研究

采用协整理论及基于VAR的Grange因果关系检验与冲击反应函数方法对中国上海期货交易所燃料油期货价格作建模分析。单位根检验显示，选取的样本序列均为I（1）。Granger因果关系检验显示：美原油期货价格，新加坡180燃料油现货价格变量为燃料油期价的Granger原因；上海燃料油期货价格是黄埔现货价格的单向的Granger原因，期货价格对现货价格具有发现作用。最终作出的长期协整方程显示：美原油期货价格，新加坡180燃料油现货价格、欧元汇率与上海燃料油现货价构成长期显著的均衡关系。美原油期货价格对沪燃料油期价的弹性为0．85；新加坡180燃料油现货价格对沪燃料油期价的弹性为0．78；欧元汇率对沪燃料油期价的弹性为1．04。从最终建立动态模型来看，模型有较好的拟合及预测精度。因此，该模型对沪燃料油期价风险控制具有较好的参考作用。     

Hedging grain price risk in the SADC: Case studies of Malawi and Zambia

We use simulation methods to examine the results of hedging maize food security imports into Malawi and Zambia on the South African Exchange (SAFEX). Results show that hedging using either futures or options can spread import costs over time, thereby reducing variability, and also possibly generating lower average costs. These benefits are increased if hedging only takes place when local prices are at less than import parity and also if the hedge is levered. However, problems will remain so long as intra-regional transport costs remain high.     

Mean Reversions in GNMA Returns

The random-walk hypothesis is tested in the prices of mortgage-backed securities traded in the secondary market. Using the variance ratio test, the random-walk hypothesis is rejected for the daily GNMA bond return. We identify two components in the return series: a systematic component reflecting the market pricing on the expected information, and a noise term that represents the pricing on the unexpected information. After adjusting for the impact of bid-ask spread and thin trading on the price quotations, the evidence suggests that the short-horizon, weekly realized return, being dominated by the negative serial correlation of the random component, exhibits a mean-reverting process. However, it is also found that the noise term demonstrates significant positive serial correlation for holding periods of over two weeks. Thus, for longer-term returns, the realized return exhibits positive dependence. The implication is that the price of GNMA bonds did not react to unexpected information in a rational fashion in that the adjustment process is not instantaneous.     

Pricing Mortgage-Backed Securities: Integrating Optimal Call and Empirical Models of Prepayment

Residential mortgage borrowers frequently appear to behave suboptimally with respect to their mortgage prepayment options. Many borrowers fail to exercise even well-into-the-money options while others prepay when the call option is out-of-the-money. To account for these apparently suboptimal prepayments, the recent trend in mortgage-backed securities research has been away from optimal call valuation models, in which the decision to exercise is determined endoge-nously, in favor of models in which prepayment behavior is exogenously specified based on empirical estimation. This paper develops a rational model of mortgage prepayment which incorporates both types of "non-optimal" prepayment and retains endogenous call. This enables the model to disentangle and compare the separate effects of the interest rate call, impeded by transaction costs, and of non-interest-rate driven prepayment. In addition, by recognizing heterogenous borrower transaction costs, the model presents a way to account more precisely for the varying prepayment lags associated with well-into-the-money call options and to account for the phenomenon of "burnout" within a mortgage pool. The paper includes an empirical test of the unbiasedness of the integrated pricing model by comparing simulated prices from our theoretical model to observed prices on traded Fannie Mae and GNMA securities.     

The Effect of Appeals on Assessment Ratio Distributions: Some Nonparametric Approaches

A variety of nonparametric methods—locally weighted regression, nonparametric quantile regression and conditional density functions—are used to evaluate the effect of appeals on assessment uniformity. Unlike previous studies, the focus is on the full distribution of assessment ratios rather than on central moments. Data for single‐family homes in Chicago for 2006 suggest that appeals lead to a modest reduction in assessment variability, but the density of extremely high assessment ratios is higher among homes without appeals. Whereas traditional methods simply indicate that assessment ratios decline with sale price, nonparametric approaches reveal that higher prices have a more pronounced effect on the variance than on the conditional expectation of the assessment ratio distribution and that the most pronounced degree of regressivity occurs at very low sales prices.     

动力煤期货上市对煤炭定价机制和行业竞争的影响研究

使用定性与定量相结合的方法,就动力煤期货上市后的发展预期,包括煤炭市场定价权变化、期现货价格的互动关系,以及动力煤期货上市对煤炭行业的影响进行了分析。     

House Prices and Inflation

The present paper examines the long-run impact of inflation on homeowner equity by investigating the relationship between house prices and the prices of nonhousing goods and services, rather than return series and inflation rates as in previous empirical studies on the inflation hedging ability of real estate. There are two reasons for this methodological departure from prior practice: (1) while the total return on housing cannot be accurately measured, the total return on housing is fully reflected in housing prices, and (2) given that using returns or differencing a time series leads to a loss of long-run information contained in the series, valuable long-run information can be captured by using prices. Also, unlike previous related studies, we exclude housing costs from goods and services prices to avoid potential bias in estimating how inflation affects housing prices. Monthly data series are collected for existing and for new house prices as well as the consumer price index excluding housing costs for the period 1968–2000. Based on both autoregressive distributed lag (ARDL) models and recursive regressions, the empirical results yield estimated Fisher coefficients that are consistently greater than one over the sample period. Thus, we infer that house prices are a stable inflation hedge in the long run.     

Determinants of GNMA Mortgage Prices

This paper contrasts three different arbitrage-based models for the pricing of GNMA securities, and analyzes the effect of different assumptions about the call policy pursued by the issuers of the underlying mortgages. Both the nature of the interest-rate uncertainty captured by the model and the assumed call policy have a major effect on the yield differentials predicted between GNMA securities and Treasury Bonds.     

Commercial Real Estate Valuation, Development and Occupancy Under Leasing Uncertainty

A model of commercial property valuation is developed where individual property owners are price takers and tenants randomly arrive and depart. Spot lease and tenant reservation prices are stochastic and correlated and can divert from but eventually revert back to market equilibrium. Within this framework we examine built property values and vacancy rates for varying parameter sets representing differing markets and economic conditions. We also examine how potential and existing vacancies, spot lease prices and tenant reservation prices feed back into development decisions. We demonstrate how preleasing acts as a hedge to the developer against the risk of leasing uncertainty.     

Risikoprämien im Erdölhandel

Risk premiums are not directly observable, since they are only a part of futures prices. In an efficient market, the historical price at maturity of the futures prices can be taken as an approximation of expected spot price. Therefore, risk premiums are identified as the bias between the historical spot prices at maturity and futures prices with the correspondent maturity. The Brent Futures markets with maturities of four months are examined. The calculated risk premiums are positive and the deviations from the historical spot price are left skewed, which implies that buyers in crude oil markets are risk averse and prudent. The risk premiums have approximately tripled in 2001–2008 to 1991–2000. This is caused either by an increased specific market risk or by inefficient information of market participants.     

Martingale property in bond futures return including volatility spillover effect from bank bill futures

This paper analyses the time series properties of the daily return from the ten-year bond futures contracts traded on the Sydney Futures Exchange (SFE), together with the transmission of volatility from other interest rate futures contracts. The methodology relies on appropriate modelling of the conditional heteroscedasticity observed in the futures price change series. It is then evident that the volatility spillover effect exists from the short-term bank bill futures to the ten-year bond futures and not the other way. This suggests that the traders attempt to make inferences from price movements in other interest rate futures contracts which ultimately impinge upon the price movement in the bond futures contracts. It is indicative of the expectation theory of the term structure.The author is Lecturer in Finance in the School of Finance and Economics, University of Technology, Sydney.     

The Long‐Run Relationship Between House Prices and Rents

I use standard error‐correction models and long‐horizon regression models to examine how well the rent–price ratio predicts future changes in real rents and prices. I find evidence that the rent–price ratio helps predict changes in real prices over 4‐year periods, but that the rent–price ratio has little predictive power for changes in real rents over the same period. I show that a long‐horizon regression approach can yield biased estimates of the degree of error correction if prices have a unit root but do not follow a random walk, and I construct bootstrap distributions to conduct appropriate inference in the presence of this bias. The results lend empirical support to the view that the rent–price ratio is an indicator of valuation in the housing market.     

Timing the Start of Material Substitution Projects: Creating Switching Options under Volatile Material Prices

Firms developing new products often face the challenge of making investment decisions under uncertain input–cost conditions due to the price volatilities of the materials they use. These decisions need to be made long before the final products are launched on the market. Therefore, firms that invest in the opportunity to switch materials in a timely manner will have the flexibility to react to material price changes and realize competitive advantages. However, volatile material prices may also cause a firm to delay investment. Using real‐options reasoning, this paper studies the influence of input‐cost fluctuations on the timing decision to start new product development (NPD) and thus create the follow‐on opportunity to later replace an existing product. A model that combines waiting and switching options to derive influencing factors of the flexibility value that triggers the investment is developed and tested on a sample of material substitution projects from manufacturing firms. The results show how price uncertainty of the new and the old material, their joint price development, the expected project duration, and competitive preemption are related to the propensity to delay the start of NPD. The findings provide new insights on how timing in adopting materials can be used to hedge exposure to volatile material prices. The insights are relevant for adopters and producers of new materials, as well as for policy makers who strive for supporting the diffusion of new materials.