Market-Implied Losses and Non-Agency Subordinated MBS

Laurent Gauthier (laurent.o.gauthier@gmail.com)
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Laurent Gauthier: LED - Laboratoire d'Economie Dionysien - UP8 - Université Paris 8 Vincennes-Saint-Denis

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Abstract: Market participants usually price new issue subordinated MBS in an ad hoc way that requires a lot of guessing and is subject to inconsistencies. An innovative method to value these securities uses market-implied loss distributions based on an analogy between derivatives products and non-agency subordinated bonds. Options are valued with implied volatilities, and subordinated MBS are valued with implied losses. This novel approach al-lows relative value analysis across the non-agency credit markets, and provides insight into some questions about the impact on fair value of subordination structural changes.

Keywords: Mortgage Backed Securities MBS; Credit risk modeling; Market implied analysis (search for similar items in EconPapers)
Date: 2003-06-30
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Published in Journal of fixed income, 2003, 13 (1), pp.49-74. ⟨10.3905/jfi.2003.319346⟩

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Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:hal-04328853

DOI: 10.3905/jfi.2003.319346

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