Understanding and measuring risks in Agency CMOs

Nicholas Arcidiacono, Lawrence R. Cordell, Andrew Davidson and Alex Levin

No 13-08, Working Papers from Federal Reserve Bank of Philadelphia

Abstract: The Agency CMO market, an often overlooked corner of mortgage finance, has experienced tremendous growth over the past decade. This paper explains the rationale behind the construction of Agency CMOs, quantifies risks embedded in Agency CMOs using a traditional and a novel approach, and offers valuable lessons learned when interpreting these risk measures. Among these lessons is that to fully understand the risks in Agency CMOs a full bond-by-bond analysis is necessary and that interest rate risk is not the only risk that needs to be considered when conducting risk management with CMOs.

Keywords: Mortgage-backed securities; Risk management (search for similar items in EconPapers)
Date: 2013
New Economics Papers: this item is included in nep-rmg and nep-ure
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