Monte Carlo method and Mortgage: Difference between pages

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In Value at Risk analysis, an alternative method for calculating the probability distribution (rather than using the Delta-normal method or the Historical simulation method).
1.  


Monte Carlo simulations consist of two steps:
An agreement under which a person borrows money against a security. 


:First, a stochastic process for financial variables is specified as well as process parameters.   
The security can be over any of the borrower’s assets but is commonly property (land and buildings) though it can be any pledgeable asset including, for example, ships or financial assets.  
   
The lender may take possession of the asset if the borrower fails to repay the money.


:Both historical data and appropriate judgement can be used for such parameters as risk and correlations.


2.


:Second, fictitious price paths are simulated for all variables of interest.  At each horizon considered, the portfolio is marked-to-market using full valuation.
The loan advanced, and the regular payment of money borrowed, under such an agreement.


:A distribution of returns is eventually produced, from which a VaR figure can be measured.
Especially a loan secured on residential property.




Comparing the methods:
3. ''Law''.


:1. The Delta-normal method is the simplest method to implement.
The legal charge taken by the lender as security for the loans described above.


:The main drawbacks are the assumption that risk factors have normal distributions, and the assumption that the assets are linear (in other words, that they do not contain options).
:2. The Historical simulation method is also relatively simple to implement. 
:The main drawback is that the historical information used may not adequately represent future probability distributions.  (This is also a drawback of the delta-normal method.)


== See also ==
* [[Affordability mortgage]]
* [[Buy-to-Let]]
* [[Charge]]
* [[CMBS]]
* [[Encumbrance]]
* [[Equity]]
* [[First mortgage debenture]]
* [[Fixed charge]]
* [[Forbearance]]
* [[Foreclosure]]
* [[Interest]]
* [[Liquidity risk]]
* [[LTV]]
* [[Pipeline risk]]
* [[Prime]]
* [[Refinancing]]
* [[Refinancing risk]]
* [[Repossession]]
* [[Security]]
* [[SVR]]


Monte Carlo techniques are designed to address these shortcomings. 
[[Category:Compliance_and_audit]]
 
Disadvantages of Monte Carlo methods include their relative complexity.
 
 
== See also ==
* [[Delta-normal method]]
* [[Historical simulation method]]
* [[Stochastic]]
* [[Value at risk]]

Revision as of 04:03, 21 January 2021

1.

An agreement under which a person borrows money against a security.

The security can be over any of the borrower’s assets but is commonly property (land and buildings) though it can be any pledgeable asset including, for example, ships or financial assets.

The lender may take possession of the asset if the borrower fails to repay the money.


2.

The loan advanced, and the regular payment of money borrowed, under such an agreement.

Especially a loan secured on residential property.


3. Law.

The legal charge taken by the lender as security for the loans described above.


See also

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