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

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Author Info
Boudoukh, Jacob, et al
Abstract

Multivariate density estimation (MDE) suggests that mortgage-backed security (MBS) prices can be well described as a function of the level and slope of the term structure. We analyze bow this function varies across MBSs with different coupons. An important finding is that the interest rate level proxies for the moneyness of the option, the expected level of prepayments, and the average life of the cash flows, while the term structure slope controls for the average rate at which these cash flows should be discounted. Though the origination and prepayment behavior of mortgages differ substantially across coupons, there remains an unexplained common factor in MBS prices. This factor does not seem to be related to the usual suspects and therefore presents a puzzle to financial economists. Coauthors are Robert F. Whitelaw, Matthew Richardson, and Richard Stanton. Article published by Oxford University Press on behalf of the Society for Financial Studies in its journal, The Review of Financial Studies.

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Publisher Info
Article provided by Oxford University Press for Society for Financial Studies in its journal Review of Financial Studies.

Volume (Year): 10 (1997)
Issue (Month): 2 ()
Pages: 405-46
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Handle: RePEc:oup:rfinst:v:10:y:1997:i:2:p:405-46

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  1. Maciej Firla-Cuchra & Tim Jenkinson, 2005. "Why are Securitization Issues Tranched?," OFRC Working Papers Series 2005fe04, Oxford Financial Research Centre. [Downloadable!]
  2. Francis A. Longstaff, 2004. "Optimal Recursive Refinancing and the Valuation of Mortgage-Backed Securities," NBER Working Papers 10422, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  3. Arvind Krishnamurthy & Annette Vissing-Jorgensen, 2007. "The Demand for Treasury Debt," NBER Working Papers 12881, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  4. Maciej Firla-Cuchra & Tim Jenkinson, 2005. "Security Design in the Real World: Why are Securitization Issues Tranched?," Economics Series Working Papers 225, University of Oxford, Department of Economics. [Downloadable!]
  5. Francis Longstaff, 2002. "Optimal Recursive Refinancing and the Valuation of Mortgage-Backed Securities," University of California at Los Angeles, Anderson Graduate School of Management 1050, Anderson Graduate School of Management, UCLA. [Downloadable!]
  6. Teresa Corzo Santamaría & Javier Gómez Biscarri, 2004. "Nonparametric Estimation of Convergence of Interest Rates: Effects on Bond Pricing," Faculty Working Papers 03/04, School of Economics and Business Administration, University of Navarra. [Downloadable!]
    Other versions:
  7. Maciej Firla-Cuchra, 2005. "Explaining Launch Spreads on Structured Bonds," Economics Series Working Papers 230, University of Oxford, Department of Economics. [Downloadable!]
  8. Xavier Gabaix & Arvind Krishnamurthy & Olivier Vigneron, 2005. "Limits of Arbitrage: Theory and Evidence from the Mortgage-Backed Securities Market," NBER Working Papers 11851, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
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