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

48 Pages Posted: 11 Nov 2008

See all articles by Jacob Boudoukh

Jacob Boudoukh

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

Matthew P. Richardson

New York University (NYU) - Department of Finance; National Bureau of Economic Research (NBER); 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: January 1995

Abstract

This paper develops a nonparametric, model-free approach to the pricing and hedging of mortgage-backed securities (MBS), using multivariate density estimation procedures to investigate the relation between MBS prices and interest rates. While the usual methods of valuing MBSs are highly dependent on specific assumptions about interest rates and prepayment, this method will yield consistent results without requiring such assumptions. Weekly MBS prices from January 1987 to May 1994 can be well described as a function of the level and slope of the term structure. Using this estimated relation to hedge the interest rate risk of MBS gives results that compare favorably with other commonly using hedging methods.

Suggested Citation

Boudoukh, Jacob and Richardson, Matthew P. and Stanton, Richard H. and Whitelaw, Robert F., Pricing Mortgage-Backed Securities in a Multifactor Interest Rate Environment: A Multivariate Density Estimation Approach (January 1995). NYU Working Paper No. FIN-94-018. Available at SSRN: https://ssrn.com/abstract=1298856

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

Matthew P. Richardson

New York University (NYU) - Department of Finance ( email )

44 West 4th Street
Suite 9-190
New York, NY 10012-1126
United States
212-998-0349 (Phone)
212-995-4233 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
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United States

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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