Credit Risk Frontiers: Subprime Crisis, Pricing and Hedging, CVA, MBS, Ratings, and Liquidity; Bielecki, Tomasz,; Damiano Brigo and Frederic Patras, eds., February 2011
42 Pages Posted: 7 Jan 2007 Last revised: 16 Mar 2011
Date Written: January 5, 2007
Valuation of mortgage backed securities (MBSs) and collateralized mortgage obligations (CMOs) is the big science of the financial world. There are many moving parts, each one drawing on expertise in a different field. Prepayment modeling draws on statistical modeling of economic behavior. Data selection draws on risk analysis. Interest rate modeling draws on classic arbitrage pricing theory applied to the fixed income market. Index projection draws on statistical analysis. Making the Monte Carlo analysis tractable requires working with numerical methods and investigation of a variety of variance reduction techniques. Tractability also requires parallelization, which draws on computer science in building computation clusters, applying new technology such as graphical processing units (GPUs), and analysis and optimization of parallel algorithms.
Here we detail the different components, describing the approach we have taken in each area. Of particular interest is how the credit crisis that started in 2007 has impacted the modeling.
The end result is that accurate price calculations on individual securities can be done in real time, and the entire universe of CMOs and MBSs can be analyzed overnight.
Keywords: MBS, CMO, OAS, credit crisis, subprime crisis, interest rate modeling, rate, yield, yield curve, Gaussian, Monte Carlo, parallelization, GPU, CUDA, Markovian, mortgage, mortgage backed, collateralized mortgage obligation, collateralized, structured product, prepayment, prepayment modeling
JEL Classification: G12, G13, C15, C51, C52, C61, C63
Suggested Citation: Suggested Citation
Stein, Harvey J. and Belikoff, Alexander L. and Levin, Kirill and Tian, Xusheng, Analysis of Mortgage Backed Securities: Before and after the Credit Crisis (January 5, 2007). Credit Risk Frontiers: Subprime Crisis, Pricing and Hedging, CVA, MBS, Ratings, and Liquidity; Bielecki, Tomasz,; Damiano Brigo and Frederic Patras, eds., February 2011. Available at SSRN: https://ssrn.com/abstract=955358
By Harvey Stein
By Ivo Pezzuto
By Wujiang Lou