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What Constitutes a Good Model? An Analysis of Models for Mortgage Backed Securities

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Author Info

  • Massoud Heidari

    (Caspian Capital Management, LLC)

  • Liuren Wu

    (Zicklin School of Business, Baruch College)

Abstract

The U.S. agency mortgage backed securities (MBS) market is deep and highly liquid, yet modeling MBS is extremely challenging. This paper applies market participants' desired requirements for a good pricing model to MBS pricing models provided by six of the top MBS dealers. We find that five out of the six models fall short of the desired requirements. The five models are highly correlated, but less correlated with the best model, indicating potential herding among MBS analysts. The most undesirable property of the failed models is the high correlation with the underlying interest rate and options markets.

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File URL: http://128.118.178.162/eps/fin/papers/0409/0409017.pdf
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Bibliographic Info

Paper provided by EconWPA in its series Finance with number 0409017.

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Length: 21 pages
Date of creation: 07 Sep 2004
Date of revision:
Handle: RePEc:wpa:wuwpfi:0409017

Note: Type of Document - pdf; pages: 21
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Web page: http://128.118.178.162

Related research

Keywords: Mortgage-backed securities; option-adjusted spreads; market efficiency;

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