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Understanding and measuring risks in Agency CMOs

Author

Listed:
  • Nicholas Arcidiacono
  • Lawrence R. Cordell
  • Andrew Davidson
  • Alex Levin

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.

Suggested Citation

  • Nicholas Arcidiacono & Lawrence R. Cordell & Andrew Davidson & Alex Levin, 2013. "Understanding and measuring risks in Agency CMOs," Working Papers 13-08, Federal Reserve Bank of Philadelphia.
  • Handle: RePEc:fip:fedpwp:13-08
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    File URL: http://www.philadelphiafed.org/research-and-data/publications/working-papers/2013/wp13-8.pdf
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    Keywords

    Mortgage-backed securities ; Risk management;

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