Pricing of mortgage‐backed securities with option‐adjusted spread

Abstract

Notes the increasing importance of option‐adjusted spread analysis for pricing in the mortgage‐backed securities market and develops a partial differentiation equation method (PDE) for calculation, as an alternative to the Monte Carlo method. Discusses the mathematical theory involved and illustrates its use with a numerical example. Claims PDE is more accurate and cheaper than the Monte Carlo method and promises a further article on using it for horizon analysis and risk management.

Citation

Liu, J. and Xu, E. (1998), "Pricing of mortgage‐backed securities with option‐adjusted spread", Managerial Finance, Vol. 24 No. 9/10, pp. 94-109. https://doi.org/10.1108/03074359810765796