PRICING FINANCIAL FUTURES: THE ROLE OF MULTIPLE DELIVERY ASSETS AND PREPAYMENTS (GNMA, MORTGAGE-BACKED SECURITIES)
Abstract
Although futures contracts written on the Government National Mortgage Association's (GNMA) mortgage-backed security have traded on the Chicago Board of Trade since 1975, an accurate pricing model for the GNMA futures contrast has not yet been developed. The goal of the dissertation is to develop a pricing model for GNMA futures contracts which includes features unique to the underlying GNMA security and to the GNMA Collateralized Depository Receipt (CDR) futures contract. Historical data is used to test the empirical validity of the model and to examine the role of the various features of the contract in determining the futures price. The model focuses on three aspects of the GNMA CDR future. Two of these aspects involve the monthly cash flows on the underlying asset. The underlying asset, which is a claim to a pool of mortgages, generates known cash flows consisting of scheduled principal and interest payments, and stochastic cash flows arising from unscheduled principal prepayments. The third aspect of the futures contract which is addressed in the model is the seller's option to select the delivery instrument from a set of deliverable securities. This right is called the quality option. Each of these features has been incorporated into the model. To accomplish this, the underlying asset is decomposed into four separate securities. The first is a claim to the regular monthly principal and interest payments. The second portion is a claim to any unscheduled principal prepayments. The seller's option to select the delivery asset is the third component. The last part of the asset is a claim on the principal balance which will remain at maturity and be available for delivery. The empirical analysis suggests that the scheduled monthly cash flows have a significant role in determining the value of the futures contract. The analysis also indicates that the contract's specifications tend to produce a bias which effectively limits the seller's choice for the appropriate delivery instrument.
Degree
Ph.D.
Subject Area
Finance
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