Mortgage Valuation Models: Embedded Options, Risk, and Uncertainty by Andrew DavidsonMortgage Valuation Models: Embedded Options, Risk, and Uncertainty by Andrew Davidson

Mortgage Valuation Models: Embedded Options, Risk, and Uncertainty

byAndrew Davidson, Alexander Levin

Hardcover | June 12, 2014

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Mortgage Backed Securities (MBS) are among the most complex of all financial instruments. Analysis of MBS requires blending empirical analysis of borrower behavior with mathematical modeling of interest rates and home prices. Over the past 25 years, Davidson and Levin have been at the leadingedge of MBS valuation and risk analysis. Mortgage Valuation Models: Embedded Options, Risk and Uncertainty is a detailed description of the sophisticated theories and advanced methods that the authors employ in real-world analysis of mortgage backed securities. Issues such as complexity, borroweroptions, uncertainty, and model risk play a central role in their approach to valuation of MBS. The book describes methods for modeling prepayments and defaults of borrowers. It explores closed form, backward induction and Monte Carlo valuation using the Option-Adjusted-Spread (OAS) approach, explains the origin of OAS and its relationship to model uncertainty. With reference to the classicalCAPM and APT, the book advocates extending the concept of risk-neutrality to modeling home prices and borrower options, well beyond interest rates. The coverage spans the range of mortgage products from loans, TBA (to be announced) pass-through securities to subordinate tranches of subprime-mortgage securitizations and describes valuation methods for both agency and non-agency MBS including pricing new loans; Davidson and Levin put forth newapproaches to prudent risk measurement, ranking, and decomposition that can help guide traders and risk managers. It reveals quantitative causes of the 2007-09 financial crisis and provides insights into the future of the US housing finance system and mortgage modeling. Despite the advances in mortgage modeling and valuation, this remains an ever-evolving field. Mortgage Valuation Models will serve as a foundation for the future development of models for mortgage-backed securities.
Andrew Davidson is a financial innovator and leader in the development of financial research and analytics. He has worked extensively on mortgage-backed securities product development, valuation, and hedging. He is president of Andrew Davidson and Co., Inc., a New York firm specializing in the application of analytical tools to investm...
Title:Mortgage Valuation Models: Embedded Options, Risk, and UncertaintyFormat:HardcoverDimensions:496 pages, 9.25 × 6.12 × 0.98 inPublished:June 12, 2014Publisher:Oxford University PressLanguage:English

The following ISBNs are associated with this title:

ISBN - 10:0199998167

ISBN - 13:9780199998166

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Table of Contents

IntroductionPart 1 Fundamentals of MBS Risk and Valuation1. Dimensions of Uncertainty2. Fundamentals of Securitization3. Investors in Mortgage-Backed Securities4. Valuation with Risk Factors and Risk Neutrality5. Short-Rate Term-Structure Modelin6. Risk-Neutral Modeling Using Forward and Futures PricesPart 2 Modeling and Valuation of Agency MBS7. Agency Pool Prepayment Models8. Engineering of Valuation Models without Simulations9. Monte Carlo Methods10. Applications of the OAS Valuation Approach to Agency MBS11. Prepayment Risk Neutrality (the concept of prOAS)Part 3 Modeling and Valuation of Non-Agency MBS12. Loan Level Modeling of Prepayment and Default13. The Concept of Credit OAS14. Empirical Modeling of Home Prices15. Credit Analysis on a Scenario Grid and Analytical ShortcutsPart 4 Analysis of the 2008-2009 Financial Crisis16. Lesson #1: The Role of Financing and Affordability in the Formation of Housing Prices17. Lesson #2: The CDO Calamity and Six Degrees of Separation18. Lesson #3: Fair versus Intrinsic Valuation under Market DuressPart 5 Building a Healthy Housing Finance System19. How to Measure Risk, Rank Deals and Set Aside Capital20. How to Price New Loans21. The Future of Housing Finance and MBS ModelingReferences