DMCA
The Pricing and Hedging of Mortgage-Backed Securities: A Multivariate Density Estimation Approach
BibTeX
@MISC{Matthew_thepricing,
author = {Jacob Boudoukh Matthew and Matthew Richardson B and Richard Stanton C and Robert F. Whitelaw A},
title = {The Pricing and Hedging of Mortgage-Backed Securities: A Multivariate Density Estimation Approach},
year = {}
}
Share
 |
 |
 |
 |
||
OpenURL
Abstract
This chapter presents a non-parametric technique for pricing and hedging mortgagebacked securities (MBS). The particular technique used here is called multivariate density estimation (MDE). We find that MBS prices can be well described as a function of two interest rate factors; the level and slope of the term structure. The interest rate level proxies for the moneyness of the prepayment option, the expected level of prepayments, and the average life of the MBS cash flows, while the term structure slope controls for the average rate at which these cash flows should be discounted. We also illustrate how to hedge the interest rate risk of MBS using our model. The hedge based on our model compares favorably with existing methods. 1 Introduction The mortgage-backed security (MBS) market plays a special role in the U.S. economy. Originators of mortgages (S&Ls, savings and commercial banks) can spread risk across the economy by packaging these mortgages into investment pools throug...
Keyphrases
mortgage-backed security multivariate density estimation approach multivariate density estimation cash flow special role interest rate factor investment pool average life non-parametric technique prepayment option mb cash flow interest rate risk particular technique average rate u.s. economy term structure slope interest rate level proxy term structure commercial bank expected level mb price
