PT  - JOURNAL ARTICLE
AU  - Xu Bai
TI  - Pricing Agency MBS under Quadratic<br/>Gaussian Models
AID  - 10.3905/jfi.2013.23.3.015
DP  - 2013 Dec 31
TA  - The Journal of Fixed Income
PG  - 15--35
VI  - 23
IP  - 3
4099  - https://pm-research.com/content/23/3/15.short
4100  - https://pm-research.com/content/23/3/15.full
AB  - Interest rate modeling is an integral part of the mortgage-backed security (MBS) pricing mechanism. The particular model choice can have a significant impact on both MBS valuation and its risk metrics. The market-implied interest rate volatility skew suggests that the interest rate distribution is often more normal than log-normal. A normal model tends to shorten the MBS durations while a log-normal model prevents the rates from going negative. This article shows how QGM models can have the best of both worlds.TOPICS: MBS and residential mortgage loans, quantitative methods