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Comparing Methods To Approximate Mortgage-Backed Security VaR
Jan 1, 2010
While the framework for pricing mortgage-backed securities (MBS) is well documented, there has been little research on developing and comparing computationally efficient methods for calculating VaR of these instruments. In this article, we focus on interest rate risk and its effect on prepayment risk, and we investigate five approaches to approximating the VaR of an MBS portfolio due to interest rate risk. Our results show that when we weigh the trade-off between accuracy and computation time, the optimal method is a multi-variable Taylor series approximation approach.
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