The Effects of Macroeconomic Factors on Pricing Mortgage Insurance Contracts

Abstract

Numerous empirical studies, including Abraham and Hendershott (1996), Muellbauer and Murphy (1997), Leung (2004), and Oikarinen (2009), have identified a significant relationship between housing prices and macroeconomic factors. Using a linear regression on the comovement of macroeconomic factors and housing prices, this article employs an option-pricing framework to price and hedge the fair premia of mortgage insurance (MI). Our model provides improved performance in terms of MI premium pricing, especially during periods that are characterized by high housing prices. Ignoring the impacts of macroeconomic factors on housing prices will lead to an underestimation of MI premia. © The Journal of Risk and Insurance, 2012.