Pricing Mortgage-Backed Security: An Empirical Analysis

Abstract

This article summarizes the factors and basic theory in mortgaged-backed securities pricing, builds suitable models for Chinese MBS product, and carries out empirical study on Jianyuan 2007-1RMBS. By assimilating the successful experiences of developed countries and regions, BDT model is applied to construct term structure of 1-year interest rate, and then under the assumption that CPR is 100% PSA, binary tree of interest rate path is generated through Monte-Carlo simulation, and finally, the option-adjusted spread (OAS) values of three tranches are calculated. The conclusion is that when OAS is low, the nominal spread equals to or slightly higher than OAS, while the difference will gradually expand with the OAS increasing. Moreover, the OAS pricing method more adapts to market-oriented interest rates, and can be used as reference in Chinese MBS pricing in the future.