Purpose – The purpose of this paper is to generalize the one-factor mortgage-backed securities (MBS)-pricing model proposed by Kariya and Kobayashi to a three-factor model. The authors describe prepayment behavior due to refinancing and rising housing prices by discrete-time, no-arbitrage...

Purpose – The purpose of this paper is to generalize the one‐factor mortgage‐backed securities (MBS)‐pricing model proposed by Kariya and Kobayashi to a three‐factor model. The authors describe prepayment behavior due to refinancing and rising housing prices by discrete‐time,...