The pricing of adjustable rate mortgage contracts |
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Authors: | J. Sa-Aadu C. F. Sirmans |
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Affiliation: | (1) Department of Finance, Graduate School of Business Administration, University of Florida, 32611 Gainesville, FL, USA;(2) Department of Finance, College of Business Administration, Louisiana State University, 70803 Baton Rouge, LA, USA |
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Abstract: | This article analyzes the structure of ARM contracts and the pricing of their component features, based on the view of ARMs as a complex bundle. Unlike previous studies, which have generally relied on option-based simulation techniques, our analysis specifies a microeconomic model of the lender as a profit-maximizer which is then tested using firm-specific data. The empirical results, which are consistent with the microeconomic model, indicate that the lender acts as a profit-maximizing firm in pricing the features of the ARM contract. Furthermore, the results suggest that while the interest-rate cap parameters dominate in the pricing of ARMs, other features are also important. Thus, theoretical and empirical ARM pricing models should embrace other features of the contract besides the cap parameters. |
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Keywords: | adjustable rate mortgages pricing features |
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