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Pricing mortgage-backed securities in a multifactor interest rate environment: a multivariate density estimation approach |
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| Authors: | Boudoukh, J Whitelaw, RF Richardson, M Stanton, R |
| Affiliation: | 1 New York University, NY, USA 2 Finance Department, Stern School of Business, 44 West 4th Street, New York, NY, USA 4 University of California, Berkeley, CA, USA 3 Corresponding author |
| Abstract: | Multivariate density estimation (MDE) suggests that mortgage-backedsecurity (MBS) prices can be well described as a function ofthe level and slope of the term structure. We analyze how thisfunction varies across MBSs with different coupons. An importantfinding is that the interest rate level proxies for the moneynessof the option, the expected level of prepayments, and the averagelife of the cash flows, while the term structure slope controlsfor the average rate at which these cash flows should be discounted. |
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