Pricing Mortgage-Backed Securities in a Multifactor Interest Rate Environment: A Multivariate Density Estimation Approach

52 Pages Posted: 11 Nov 2008

See all articles by Jacob Boudoukh

Jacob Boudoukh

Interdisciplinary Center (IDC) Herzliyah; AQR Capital Management, LLC

Richard Stanton

University of California, Berkeley - Haas School of Business

Robert Whitelaw

New York University; National Bureau of Economic Research (NBER)

Multiple version iconThere are 4 versions of this paper

Date Written: March 1995

Abstract

This paper develops a nonparametric, model-free approach to the pricing of mortgage-backed securities (MBS), using multivariate density estimation (MDE) procedures to investigate the relation between MBS prices and interest rates. While the usual methods for valuing MBSs are highly dependent on specific assumptions about interest rates and prepayments, this method will yield consistent results without requiring such assumptions. The MDE estimation suggests that weekly MBS prices from January 1987 to May 1994 can be well described as a function of the level slope of the term structure. We analyze how this function varies across MBSs with different coupons and investigate the sensitivity of price to the two factors. As an application, we use the estimated relation to hedge the interest rate risk of MBSs. These hedging results compare favorably with other commonly used hedging methods.

Suggested Citation

Boudoukh, Jacob and Stanton, Richard H. and Whitelaw, Robert F., Pricing Mortgage-Backed Securities in a Multifactor Interest Rate Environment: A Multivariate Density Estimation Approach (March 1995). NYU Working Paper No. FIN-95-013. Available at SSRN: https://ssrn.com/abstract=1298320

Jacob Boudoukh (Contact Author)

Interdisciplinary Center (IDC) Herzliyah ( email )

P.O. Box 167
Herzliya, 46150
Israel

AQR Capital Management, LLC ( email )

Greenwich, CT
United States

Richard H. Stanton

University of California, Berkeley - Haas School of Business ( email )

Haas School of Business
545 Student Services Building #1900
Berkeley, CA 94720-1900
United States
(510) 642-7382 (Phone)
(510) 643-1412 (Fax)

Robert F. Whitelaw

New York University ( email )

Stern School of Business
44 West 4th Street
New York, NY 10012-1126
United States
212-998-0338 (Phone)
212-995-4233 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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