Pricing Mortgage Insurance with Asymmetric Jump Ri

Authors: ChiaChien Chang WeiYi Huang SoDe Shyu

Publish Date: 2011/03/08

Volume: 45, Issue: 4, Pages: 846-868

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Abstract

This study provides the valuation of mortgage insurance MI considering upward and downward jumps in housing prices which display separate distributions and probabilities of occurrence and the mortgage insurer’s default risk The empirical results indicate that the asymmetric double exponential jump diffusion performs better than the lognormally distributed jump diffusion and the BlackScholes model generally used in previous literature to fit the singlefamily mortgage national average of all home prices in the US Finally the sensitivity analysis shows that the MI premium is an increasing function of the normal volatility the mean downjump magnitudes the shock frequency of the abnormal bad events and the assetliability structure of the mortgage insurer In particular the shock frequency of the abnormal bad events has the largest effect of all parameters on the MI premium The assetliability structure of the mortgage insurer and shock frequency of the abnormal bad events have a larger effect of all parameters on the default risk premium

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