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Industry practice for IR models in MBS
I am trying to determine what IR models/frameworks are used in the industry for pricing of MBS? Thank you.
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- JinhuaColin
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Industry practice for IR models in MBS
Some commercial banks only use static yield curve. No model at all.
Industry practice for IR models in MBS
The question was much more interesting and important 20-25 years ago, when prepayment was largely an interest rate game, you had active trading of a variety of CMO products, and you could trade MBS against pure IR derivatives like index amortizing swaps. These days, when prepayment modeling seems to come down to estimating the capability of Wells Fargo to process refinancing applications along with guessing the political/regulatory climate in DC, not so much. So probably a 2-factor Gaussian model...