Pricing and risk measures of mortgage backed securities with PDE method

Xuefei He, Simon Acomb, Ser-Huang Poon

Research output: Working paper

Abstract

In this paper, we adopt a partial di¤erential equation (PDE) approach to calculate price and risk measures for mortgage backed securities (MBS). The interest rate path-dependency is handled by an augmented state variable with discrete updating. Compared with the Monte Carlo method, valuation based on the PDE method leads to about 100 times speed up for a range of pass-through and structured MBS. We show how option adjusted spread, duration, convexity, vega and value at risk canbe calculated for MBS under our PDE scheme with many fold speed up.
Original languageEnglish
Number of pages27
Publication statusPublished - Aug 2011

Keywords

  • Mortgage Backed Securities, Collateralized Mortgage Obligations, Partial

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