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Mortgage Valuation Models at Prudential Securities

Author

Listed:
  • Yosi Ben-Dov

    (Rappaport Institute, Haifa, Israel 31096)

  • Lakhbir Hayre

    (Financial Strategies Group, Prudential Securities, Incorporated, One Seaport Plaza, New York, New York 10292)

  • Vincent Pica

    (Financial Strategies Group, Prudential Securities, Incorporated, One Seaport Plaza, New York, New York 10292)

Abstract

During the last four years, Prudential Securities Inc (PSI) has built a premier mortgage-backed securities (MBSs) department. Due to the complexity of the securities, standard fixed-income valuation tools are inadequate for MBSs. The development of sound and accurate models has been an integral part of the growth of the department. These models use a variety of management science techniques, including regression analysis, probabilistic modeling, Monte Carlo simulation, and linear, integer, and nonlinear programming. The models allow the firm to quickly and accurately value, and hence trade, complex MBSs, to properly hedge MBSs in inventory, and to structure clients' portfolios to achieve given objectives while staying within specified constraints. The models are used hundreds of times each day by traders, salespeople, and clients to evaluate MBSs, and they form the basic tools necessary for the firm to participate successfully in the mortgage market.

Suggested Citation

  • Yosi Ben-Dov & Lakhbir Hayre & Vincent Pica, 1992. "Mortgage Valuation Models at Prudential Securities," Interfaces, INFORMS, vol. 22(1), pages 55-71, February.
    • Handle: RePEc:inm:orinte:v:22:y:1992:i:1:p:55-71
    DOI: 10.1287/inte.22.1.55
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    Citations

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    Cited by:

    1. ManMohan S. Sodhi, 2005. "LP Modeling for Asset-Liability Management: A Survey of Choices and Simplifications," Operations Research, INFORMS, vol. 53(2), pages 181-196, April.
    2. Peter C. Bell & Chris K. Anderson & Stephen P. Kaiser, 2003. "Strategic Operations Research and the Edelman Prize Finalist Applications 1989--1998," Operations Research, INFORMS, vol. 51(1), pages 17-31, February.
    3. Escudero Bueno, Laureano F. & Garín Martín, María Araceli & Merino Maestre, María & Pérez Sainz de Rozas, Gloria, 2005. "A two-stage stochastic integer programming approach," BILTOKI 1134-8984, Universidad del País Vasco - Departamento de Economía Aplicada III (Econometría y Estadística).
    4. Peter C. Bell & Chris K. Anderson, 2002. "In Search of Strategic Operations Research/Management Science," Interfaces, INFORMS, vol. 32(2), pages 28-40, April.
    5. John Board & Charles Sutcliffe & William T. Ziemba, 2003. "Applying Operations Research Techniques to Financial Markets," Interfaces, INFORMS, vol. 33(2), pages 12-24, April.
    6. Golub, Bennett & Holmer, Martin & McKendall, Raymond & Pohlman, Lawrence & Zenios, Stavros A., 1995. "A stochastic programming model for money management," European Journal of Operational Research, Elsevier, vol. 85(2), pages 282-296, September.
    7. Consiglio, Andrea & Zenios, Stavros A., 1997. "A model for designing callable bonds and its solution using tabu search," Journal of Economic Dynamics and Control, Elsevier, vol. 21(8-9), pages 1445-1470, June.

    More about this item

    Keywords

    finance/securities; programming;

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