TITLE

Does Prepayment Risk of Mortgages Affect Excess Returns of Bank Stocks?

AUTHOR(S)
He, Ling T.
PUB. DATE
January 2007
SOURCE
Business Economics;Jan2007, Vol. 42 Issue 1, p45
SOURCE TYPE
Academic Journal
DOC. TYPE
Article
ABSTRACT
This paper explores the relationship between the prepayment risk embedded in conventional, fixed-rate residential mortgages and excess returns for bank stocks. There are two interesting findings in this study. First, commercial banks traded in the Nasdaq market are more mean-variance efficient than the other seven groups of industrial stocks. Second, the prepayment risk factor is significant for these banks. The prepayment risk mainly reflects a call option embedded in a mortgage plus foreclosure costs associated with a mortgage put option. This risk is measured by a remaining part of mortgage rates after excluding the influence of real estate market, maturity, and default risks on mortgage rates. The results of this study suggest that the prepayment risk factor does significantly affect excess returns for bank stocks in the period with high levels of mortgage refinancing activities.
ACCESSION #
24551576

 

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