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Rank-Based Error Tracking for Agency MBS Prepayment Models

categories: Americas, Asia Pacific, Australia, EMEAI, ZHANG David, Factor and Risk Modeling, Risk Management, Asset Managers (Quant or Fundamental), Banks, Asset Owners, Hedge Funds, Risk Management Analytics, Fixed Income

Model testing, also called error tracking, is a key requirement for collateral behavior forecasting models in securitized products. The high dimensionality and statistical noise associated with agency mortgage-backed securities prepayment behavior makes error tracking a complex task. The traditional method focuses on a single dimension, and does not provide a clear measure of model accuracy and effectiveness.

A rank-based error-tracking methodology provides an efficient and comprehensive approach to measure model performance. It provides a definition of accuracy which allows a clear comparison among models. This is superior to the existing one-dimensional method and other supplement methods. We discuss these issues as well as applicable statistical theory and potential applications. ©2020 Pageant Media. Republished with permission of IPR Journal, from “Rank-Based Error Tracking for Agency MBS Prepayment Models.” Jiawei “David” Zhang. Vol. 30, No. 1, 2020.

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