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The Journal of Real Estate Finance and Economics

, Volume 58, Issue 1, pp 133–157 | Cite as

How Big are the Ambiguity-Based Premiums on Mortgage Insurances?

  • Chang-Chih Chen
  • Chia-Chien Chang
Article
  • 96 Downloads

Abstract

This paper studies how ambiguity aversion affects the pricing of mortgage insurance (MI). We consider pricing-kernel ambiguity arising from market incompleteness. This ambiguity model is applied to a standard framework of MI-ML (mortgage loan) structural pricing. Our quantitative results show that insurers’ ambiguity aversion generates substantial positive effects on MI premium. Ambiguity impacts are highly sensitive to loan-to-value ratio, ambiguity magnitude, and the tightness of information constraints. By using the U.S. city-level housing and mortgage data, we estimate that, on average, ambiguity aversion increases MI premium rate by 77 % (46 bps), and explains about 60–90 % of pricing errors.

Keywords

Ambiguity aversion Mortgage insurance premium Market incompleteness Pricing kernel Housing assets 

JEL Classifications

G1 G2 

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Copyright information

© Springer Science+Business Media New York 2016

Authors and Affiliations

  1. 1.International Center of Financial ResearchJiangxi Normal UniversityNanchangChina
  2. 2.Department of FinanceNational Kaohsiung University of Applied ScienceKaohsiung CityTaiwan

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