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Understanding and measuring risks in Agency CMOs

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  • Nicholas Arcidiacono
  • Larry Cordell
  • Andrew Davidson
  • Alex Levin
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    Abstract

    The Agency CMO market, an often overlooked corner of mortgage finance, has experienced tremendous growth over the past decade. This paper explains the rationale behind the construction of Agency CMOs, quantifies risks embedded in Agency CMOs using a traditional and a novel approach, and offers valuable lessons learned when interpreting these risk measures. Among these lessons is that to fully understand the risks in Agency CMOs a full bond-by-bond analysis is necessary and that interest rate risk is not the only risk that needs to be considered when conducting risk management with CMOs.

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    File URL: http://www.philadelphiafed.org/research-and-data/publications/working-papers/2013/wp13-8.pdf
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    Bibliographic Info

    Paper provided by Federal Reserve Bank of Philadelphia in its series Working Papers with number 13-08.

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    Date of creation: 2013
    Date of revision:
    Handle: RePEc:fip:fedpwp:13-08

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    Related research

    Keywords: Mortgage-backed securities ; Risk management;

    This paper has been announced in the following NEP Reports:

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