RT Journal Article SR Electronic T1 Pricing Agency MBS under Quadratic
Gaussian Models JF The Journal of Fixed Income FD Institutional Investor Journals SP 15 OP 35 DO 10.3905/jfi.2013.23.3.015 VO 23 IS 3 A1 Xu Bai YR 2013 UL https://pm-research.com/content/23/3/15.abstract 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