IDEAS home Printed from
   My bibliography  Save this paper

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


  • Massoud Heidari

    (Caspian Capital Management, LLC)

  • Liuren Wu

    (Zicklin School of Business, Baruch College)


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.

Suggested Citation

  • Massoud Heidari & Liuren Wu, 2004. "What Constitutes a Good Model? An Analysis of Models for Mortgage Backed Securities," Finance 0409017, EconWPA.
  • Handle: RePEc:wpa:wuwpfi:0409017
    Note: Type of Document - pdf; pages: 21

    Download full text from publisher

    File URL:
    Download Restriction: no


    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.

    Cited by:

    1. Alexander N. Bogin & Nataliya Polkovnichenko & William M. Doerner, 2015. "Additional Market Risk Shocks: Prepayment Uncertainty and Option-Adjusted Spreads," FHFA Staff Working Papers 15-03, Federal Housing Finance Agency.

    More about this item


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

    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

    NEP fields

    This paper has been announced in the following NEP Reports:


    Access and download statistics


    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:wpa:wuwpfi:0409017. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (EconWPA). General contact details of provider: .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.