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Abstract: A CAPM View of VRMs

Published online by Cambridge University Press:  19 October 2009

M. Chapman Findlay III ,
Rocky A. Tarantello  and
Richard V. Eastin
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Extract

Employing a stochastic scenario approach and the capital asset pricing model, this study examines the position of shareholders in a hypothetical (modal) savings and loan association (SLA) holding a variable-rate mortgage (VRM) portfolio relative to the position of shareholders in an association holding fixed-rate mortgage (FRM) instruments. Because of the impossibility of accurately forecasting interest rates far into the future, the scenario approach was utilized to compare the two mortgage forms under simulated rising, falling and zero trend interest rate environments over a 30-year amortization period. Each scenario was generated by randomly selecting values from a distribution of first differences extracted from historical values of the Federal Home Loan Bank Average Cost of Funds Index.

Type
X. Capital Asset Pricing
Information
Journal of Financial and Quantitative Analysis , Volume 11 , Issue 4 , November 1976 , pp. 625
Copyright
Copyright © School of Business Administration, University of Washington 1976

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