ONE- AND MULTI-FACTOR VALUATION OF MORTGAGES: COMPUTATIONAL PROBLEMS AND SHORTCUTS

Alexander Levin
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Alexander Levin: The Dime Bancorp, Inc., Treasury Department, 589 5th Ave., New York, NY 10017, USA

Chapter 10 in Quantitative Analysis in Financial Markets:Collected Papers of the New York University Mathematical Finance Seminar(Volume II), 2001, pp 266-294 from World Scientific Publishing Co. Pte. Ltd.

Abstract: AbstractA new valuation method is proposed that can be mathematically viewed as a numerical shortcut to approximately solve the partial differential equation written for Expected Instantaneous Return. The method derives OAS as "static spread plus cost of convexity" and is based on some simplified parametric assumption about the static spread's time behavior. The modeling and numerical procedure details are disclaimed with proven accuracy and time efficiency in option-adjusted valuation.The method is especially effective for multi-scenario pricing, portfolio pricing, risk management and reporting, and for quantifying the impact of "non-traded" factors on reward and risk of holding mortgages. A systematic methodology for comprehensive multi-factor analysis is covered.

Date: 2001
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