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1 – 10 of 111Takeaki Kariya, Fumiaki Ushiyama and Stanley R. Pliska
The purpose of this paper is to generalize the one‐factor mortgage‐backed securities (MBS)‐pricing model proposed by Kariya and Kobayashi to a three‐factor model. The authors…
Abstract
Purpose
The purpose of this paper is to generalize the one‐factor mortgage‐backed securities (MBS)‐pricing model proposed by Kariya and Kobayashi to a three‐factor model. The authors describe prepayment behavior due to refinancing and rising housing prices by discrete‐time, no‐arbitrage pricing theory, making an association between prepayment behavior and cash flow patterns.
Design/methodology/approach
The structure, rationality and potential for practical use of our model is demonstrated by valuing an MBS via Monte Carlo simulation and then conducting a comparative static analysis.
Findings
The proposed model is found to be effective for analysing MBS cash flow patterns, making a decision for bond investments and risk management due to prepayment.
Originality/value
While the one‐factor valuation model Kariya and Kobayashi treated is a basic framework, the generalized model presented in this paper is much more effective for analysing MBS cash flow patterns, making a decision for bond investments and risk management due to prepayment.
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Hyeon-Wuk Tae, Ung-Gi Seo, Bong-Gyu Jang, Jun Kim, Jong-Hyuk Roh and Seryoong Ahn
This paper introduces a basic model and an extended model to evaluate the pass-through mortgage-backed securities (MBS) recently issued by Korea Housing Finance Corporation. The…
Abstract
This paper introduces a basic model and an extended model to evaluate the pass-through mortgage-backed securities (MBS) recently issued by Korea Housing Finance Corporation. The basic model assumes that the processes of interest rates, prepayment rates, and option-adjusted spreads have simple forms, of which parameters can be easily estimated by the market data available today. This paper presents the pricing formula on the basic model and the demonstrations under the present market data. We also suggest an extended model, a new but complicated model for pricing pass-through MBS, in which the interest rates and prepayment rates follow stochastic processes, and the option-adjusted spread is decomposed into one from refinancing and the other from mortgage turnover. However, since this kind of pass-through MBS has been traded in Korean financial market only recently, the market parameters in the extended model are not able to be estimated properly. We, instead, develop the pricing formula under the extended model and present the process of estimation of the parameters of the model. The participants in Korean MBS market can price the pass-through MBS for now under the basic model with limited set of data available, and later, when the market data is accumulated enough to estimate the parameters properly, they can take advantage of the extended model.
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Residential mortgage loans as well as the MBS (mortgage-backed security), which securitizes these loans, are exposed to prepayment risk. We examine the effect of prepayment…
Abstract
Residential mortgage loans as well as the MBS (mortgage-backed security), which securitizes these loans, are exposed to prepayment risk. We examine the effect of prepayment process on the duration of the CMO (multi-tranche MBS). In particular, we examine the effect of partial pass-through where there is a call limit expressed as a percentage of initial tranche balance. Due to the absence of empirical research on the CMO duration, neither the actual CMO duration nor the determinants of the CMO duration have been reported. Our study reports the actual CMO duration and the determinants of the CMO duration. By showing that the CMO duration is much shorter than the nominal time-to-maturity we point to the need to search for longer duration MBS structures. We find that in both the deterministic and stochastic interest rate environments duration is reduced as prepayment speed rises and duration rises as call limit decreases.
We make contribution to the literature by shedding light on the effect of prepayment and call limit on the duration of multi-tranche MBS. In particular, this research characterizes the impact of the partial pass-through structuring approach on the CMO duration as well as CMO pricing. Finally, it assists CMO investors in better assessing and managing reinvestment risks of pass-through products.
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PETER RUBINSTEIN, LEO M. TILMAN and ALAN TODD
This article discusses credit migration of diversified loan pool securitizations, as evidenced by the ratings transitions of mortgage‐backed securities (MBS) and asset‐backed…
Abstract
This article discusses credit migration of diversified loan pool securitizations, as evidenced by the ratings transitions of mortgage‐backed securities (MBS) and asset‐backed securities (ABS). The authors contrast the ratings (i.e., credit) stability of MBS and ABS relative to ratings migration of general obligation corporate credit. They also use holding period returns to compare the total return portfolios of MBS/ABS to portfolios of senior unsecured corporate obligations.
J. PAUL JOSHI and LARRY SWERTLOFF
The advent of derivatives and structured products has coincided with a proliferation of fixed income models used to analyze hedging, pricing, forecasting, and estimation for the…
Abstract
The advent of derivatives and structured products has coincided with a proliferation of fixed income models used to analyze hedging, pricing, forecasting, and estimation for the term structure of interest rates. This article evaluates five models Ho‐Lee (HL); Black‐Derman‐Toy (BDT); Vasicek; Cox‐Ingersoll‐Ross (CIR); and Heath‐Jarrow‐Morton (HJM) (see Exhibit 1) that are currently used by structured finance practitioners. We suggest which models are most appropriate for assets with different time horizons, interest rate sensitivities and cashflow properties. The authors link model selection to structured financial instruments with the singular focus on the trade‐off between model precision/complexity and calculation costs.
There are striking similarities between publicly-held government-sponsored enterprises (GSEs) such as Fannie Mae and Freddie Mac and investor-owned public utilities. Each firm…
Abstract
There are striking similarities between publicly-held government-sponsored enterprises (GSEs) such as Fannie Mae and Freddie Mac and investor-owned public utilities. Each firm enjoys large scale economies that give a significant competitive advantage over other companies, possesses a dominant market position that it may be able to exploit to earn profits above competitive levels, and has a strong incentive to enter new markets when the life cycle of its core markets constrain its ability to increase profits. The recent behavior of Fannie Mae and Freddie Mac indicates that the government must impose more stringent economic regulation on those GSEs in order to be sure that they achieve their public purposes.
Fannie Mae and Freddie Mac receive explicit and implicit off-budget subsidies from the federal government. This paper reviews the methods to estimate the dollar amount of the…
Abstract
Fannie Mae and Freddie Mac receive explicit and implicit off-budget subsidies from the federal government. This paper reviews the methods to estimate the dollar amount of the subsidies. None of the three techniques to estimate the indirect subsidy yield accurate point estimates. They do suggest that Fannie and Freddie could receive billions of dollars in subsidies in some years and much smaller amounts in other years. However, assessing the size of the implied subsidies is most valuable in demonstrating that Fannie and Freddie, not the federal government, control their size. Efforts to improve federal control face significant difficulties including informational asymmetries and the political incentives that have led to the status quo. These drawbacks bolster the rationale for eliminating federal support for Fannie and Freddie.
Majed R. Muhtaseb and Chun Chun “Sylvia” Yang
The purpose of this paper is two fold: educate investors about hedge fund managers' activities prior to the fraud recognition by the authorities and to help investors and other…
Abstract
Purpose
The purpose of this paper is two fold: educate investors about hedge fund managers' activities prior to the fraud recognition by the authorities and to help investors and other stakeholders in the hedge fund industry identify red flags before fraud is actually committed.
Design/methodology/approach
The paper investigates fraud committed by the Bayou Funds, Beacon Hill Asset Management, Lancer Management Group (LMG), Lipper & Company and Maricopa investment fund. The fraud activities took place during 2000 and 2005.
Findings
The five cases alone cost the hedge fund investors more than $1.5 billion. Investors may have had a good opportunity for avoiding the irrecoverable costs of the fraud had they carefully vetted the backgrounds of the hedge fund managers and/or continuously monitored the funds activities, especially during turbulent market environments.
Originality/value
This is the first research paper to identify and extensively investigate fraud committed by hedge funds. In spite of the size of the hedge fund industry and relatively substantial level and inevitably recurring fraud, academic journals are to yet address this issue. The paper is of great value to hedge funds and their individual and institutional investors, asset managers, financial advisers and regulators.
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William E. Balson and Gordon Rausser
Risk-based clearing has been proposed by Rausser et al. (2010) for over-the-counter (OTC) derivatives. This paper aims to illustrate the application of risk-based margins to a…
Abstract
Purpose
Risk-based clearing has been proposed by Rausser et al. (2010) for over-the-counter (OTC) derivatives. This paper aims to illustrate the application of risk-based margins to a case study of the mortgage-backed securities derivative portfolio of the American International Group (AIG) during the period 2005-2008. There exists sufficient publicly available information to examine AIG’s derivative portfolio and how that portfolio would depend on conjectural changes in margin requirements imposed on its OTC derivative positions. Generally, such data on OTC derivative portfolio positions are unavailable in the public domain, and thus, the AIG data provide a unique opportunity for an objective evaluation.
Design/methodology/approach
This paper uses modern financial methodology to evaluate risk-based margining and collateralization for the major OTC derivative portfolio of the AIG.
Findings
This analysis reveals that a risk-based margin procedure would have led to earlier margin calls of greater magnitude initially than the collateral calls actually faced by AIG Financial Products (AIGFP). The total margin ultimately required by the risk-based procedure, however, is similar in magnitude to the collateral calls faced by AIGFP by August 2008. It is likely that a risk-based clearing procedure applied to AIG’s OTC contracts would have led to the AIG undertaking significant hedging and liquidation of their OTC positions well before the losses built up to the point they had, perhaps avoiding the federal government’s orchestrated restructuring that occurred in September 2008.
Originality/value
There has been no published risk-based evaluations of a major OTC portfolio of derivatives for any company, let alone the AIG.
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– The purpose of this paper is to provide a cohesive review of the major findings in the literature concerning the Global Financial Crisis.
Abstract
Purpose
The purpose of this paper is to provide a cohesive review of the major findings in the literature concerning the Global Financial Crisis.
Design/methodology/approach
Papers published in top-rated finance and economics journal since the crisis up to the present were reviewed. A large number of these were selected for inclusion, primarily based on the number of citations they had received adjusted for the amount of time elapsed since their publication, but also partly based on how well they fit in with the narrative.
Findings
Much has been done to investigate the causes of the Global Financial Crisis, its effects on various aspects of the financial system, and the effectiveness of regulatory measures undertaken to restore the financial system. While more remains to be done, the existing body of research paints an interesting picture of what happened and why it happened, describes the interrelationships between the mortgage markets and financial markets created by the large scale securitization of financial assets, identifies the problems created by these inter-linkages and offers possible solutions, and assesses the effectiveness of the regulatory response to the crisis.
Originality/value
This study summarizes a vast amount of literature using a framework that allows the reader to quickly absorb a large amount of information as well as identify specific works that they may wish to examine more closely. By providing a picture of what has been done, it may also assist the reader in identifying areas that should be the subject of future research.
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