Analysis of Mortgage Backed Securities: Before and after the Credit Crisis

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

Harvey J. Stein

Bloomberg L.P.; Columbia University - Department of Mathematics

Alexander L. Belikoff

Google Inc.

Kirill Levin

Bloomberg Financial Markets (BFM) - Bloomberg LP

Xusheng Tian

Bloomberg L.P. - R&D

Date Written: January 5, 2007

Abstract

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

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

Harvey J. Stein (Contact Author)

Bloomberg L.P. ( email )

731 Lexington Avenue
New York, NY 10022
United States
212 617 3059 (Phone)

Columbia University - Department of Mathematics ( email )

New York, NY
United States

Alexander L. Belikoff

Google Inc. ( email )

76 Ninth Ave.
New York, NY 10011
United States

HOME PAGE: http://www.google.com

Kirill Levin

Bloomberg Financial Markets (BFM) - Bloomberg LP ( email )

731 Lexington Avenue
New York, NY 10022
United States

Xusheng Tian

Bloomberg L.P. - R&D ( email )

New York, NY
United States

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