Estimation of Housing Price Jump Risks and Their Impact on the Valuation of Mortgage Insurance Contracts

Authors

  • Ming-Chi Chen,

    1. Ming-Chi Chen is from National Sun Yat-sen University, Kaohsiung, Taiwan. Chia-Chien Chang is from National Kaohsiung University of Applied Science, Kaohsiung, Taiwan. Shih-Kuei Lin is from National University of Kaohsiung, Kaohsiung, Taiwan. So-De Shyu is from National Sun Yat-sen University, Kaohsiung, Taiwan. Ming-Chi Chen can be contacted via e-mail: mcchen@finance.nsysu.edu.tw. The authors are grateful for the valuable comments of the anonymous referees.
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  • Chia-Chien Chang,

    1. Ming-Chi Chen is from National Sun Yat-sen University, Kaohsiung, Taiwan. Chia-Chien Chang is from National Kaohsiung University of Applied Science, Kaohsiung, Taiwan. Shih-Kuei Lin is from National University of Kaohsiung, Kaohsiung, Taiwan. So-De Shyu is from National Sun Yat-sen University, Kaohsiung, Taiwan. Ming-Chi Chen can be contacted via e-mail: mcchen@finance.nsysu.edu.tw. The authors are grateful for the valuable comments of the anonymous referees.
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  • Shih-Kuei Lin,

    1. Ming-Chi Chen is from National Sun Yat-sen University, Kaohsiung, Taiwan. Chia-Chien Chang is from National Kaohsiung University of Applied Science, Kaohsiung, Taiwan. Shih-Kuei Lin is from National University of Kaohsiung, Kaohsiung, Taiwan. So-De Shyu is from National Sun Yat-sen University, Kaohsiung, Taiwan. Ming-Chi Chen can be contacted via e-mail: mcchen@finance.nsysu.edu.tw. The authors are grateful for the valuable comments of the anonymous referees.
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  • So-De Shyu

    1. Ming-Chi Chen is from National Sun Yat-sen University, Kaohsiung, Taiwan. Chia-Chien Chang is from National Kaohsiung University of Applied Science, Kaohsiung, Taiwan. Shih-Kuei Lin is from National University of Kaohsiung, Kaohsiung, Taiwan. So-De Shyu is from National Sun Yat-sen University, Kaohsiung, Taiwan. Ming-Chi Chen can be contacted via e-mail: mcchen@finance.nsysu.edu.tw. The authors are grateful for the valuable comments of the anonymous referees.
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Abstract

Housing price jump risk and the subprime crisis have drawn more attention to the precise estimation of mortgage insurance premiums. This study derives the pricing formula for mortgage insurance premiums by assuming that the housing price process follows the jump diffusion process, capturing important characteristics of abnormal shock events. This assumption is consistent with the empirical observation of the U.S. monthly national average new home returns from 1986 to 2008. Furthermore, we investigate the impact of price jump risk on mortgage insurance premiums from shock frequency of the abnormal events, abnormal mean and volatility of jump size, and normal volatility. Empirical results indicate that the abnormal volatility of jump size has the most significant impact on mortgage insurance premiums.

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