What Constitutes a Good Model? An Analysis of Models for Mortgage Backed Securities
Caspian Capital Management, LLC
City University of New York, CUNY Baruch College - Zicklin School of Business
August 31, 2004
The U.S. agency mortgage backed securities (MBS) market is deep and highly liquid, yet modeling MBS is extremely challenging. This paper applies market participants' desired requirements for a good pricing model to MBS pricing models provided by six of the top MBS dealers. We find that five out of the six models fall short of the desired requirements. The five models are highly correlated, but less correlated with the best model, indicating potential herding among MBS analysts. The most undesirable property of the failed models is the high correlation with the underlying interest rate and options markets.
Number of Pages in PDF File: 21
Keywords: Mortgage-backed securities, option-adjusted spreads, market efficiency
JEL Classification: G10, G13, G14working papers series
Date posted: September 3, 2004
© 2013 Social Science Electronic Publishing, Inc. All Rights Reserved.
This page was processed by apollo4 in 1.078 seconds