Fixed Income Capital Markets:
Euromoney Institutional Investor PLC
Journal 4 issues per annum
The Journal of Fixed Income (JFI) provides technical, sophisticated research in bonds: mortgage-backed securities, high yield bonds, futures and options, municipal and global bonds, corporates and asset-backed securities. Industry experts offer penetrating analysis on fixed income structuring, asset allocation, performance measurement, risk management and more.
The Journal of Fixed Income brings you powerful analyses of innovative theories and market-tested strategies by the best minds in the fixed-income field.
It features contributions by leading practitioners and academics on such timely topics as mortgage-backed securities, corporate bonds, asset-backed securities, high-yield bonds, international bond markets, futures, swaps, options, caps and floors. With this valuable guide you can:
- Evaluate relative risk and return features between different securities and different markets.
- Learn how to predict security performance in different environments and under various economic outlooks.
- Enhance valuation techniques for complex securities and various derivative products.
- Determine when distressed securities are undervalued.
Articles are well-grounded in financial theory, and contain direct applications for fixed-income portfolio managers, investors, research analysts, and other fixed-income professionals. You’ll find proven ideas and techniques you can use in your day-to-day business and investment decision-making.
Sample Contents fromVolume 11, Number 1
How Much Mortgage Pool Information Do Investors Need?
Bennett, Paul ; Peach, Richard ; Peristiani, Stavros
June 2001, Volume 11, Number 1, Pages 8 - 16
Investors in pools of single-family mortgage loans may have only limited information about the individual loans within a pool. Would more information be useful? The authors use data on individual loans to estimate a model of sales, refinancings, and defaults. They construct hypothetical loan pools and examine their prepayment sensitivity to collateral and credit information not universally made available to investors. Simulations show that loan-level data can be extremely valuable in predicting pool durations. In particular, information on the distributions of homeowners’ loan-to-value ratios—and to a lesser extent on their credit scores—can be quite important in distinguishing fast-paying from slow-paying pools.
A Fixed-Rate Mortgage Valuation Model in Three State Variables
Brunson, Andrew L.; Kau, James B.; Keenan, Donald C.
June 2001, Volume 11, Number 1, Pages 17 - 28
This article investigates the effect of a two-factor interest rate process on the value of the mortgage and its inherent options including the right to default. Our complete three-state model for a mortgage derivative asset is used to make comparisons with the standard two-state model with the option to default or prepay. With slight modification, this model is applicable to other types of mortgages and mortgage-backed securities, and to derivative securities in general. The authors demonstrate that a two-state model with a one-factor term structure and a three-state model with a two-factor term structure value a mortgage substantially differently. The results suggest that valuing defaultable mortgages requires a three-state option pricing model to avoid mispricing.
Linkages Between Secondary and Primary Markets for Mortgages
Gonzalez-Rivera, Gloria
June 2001, Volume 11, Number 1, Pages 29 - 36
The author analyzes the role of the retained portfolio investments of the government-sponsored enterprises, FNMA and FHLMC. The retained portfolio is shown to be a powerful instrument to influence yield spreads in the secondary and primary markets for mortgages. The long-run investment function links mortgage yields to the volume of their portfolio investments, guaranteeing that the spread cannot diverge indefinitely. A one basis point increase in the spread is estimated to produce an infusion of $554 million in the secondary market. When there is a deviation from long-run equilibrium investment levels, short- run dynamics (changes in purchases and spread) are set in motion to correct the disequilibrium. These benefits are passed directly to the homeowner. There is a one-to-one transmission mechanism; a reduction of one 1 bp in the secondary market spread reduces the primary market spread by 1 bp, rendering these markets efficient.
A Capital Markets View of Mortgage Servicing Rights
Aldrich, Simon P.B.; Greenberg, William R.; Payner, Brook S.
June 2001, Volume 11, Number 1, Pages 37 - 54
This article describes a consistent framework for the valuation and hedging of mortgage servicing rights using the interest-only (IO) securities markets. It explores the similarities and differences between the mortgage servicing and IO securities markets. After discussing some of the characteristics and risks inherent in an investment in mortgage servicing rights, the authors use option pricing techniques to look at mortgage servicing valuation in the context of IO market valuations. Results show the relationships between the two markets.
Quantifying the Refinance Incentive and Losses from Prepayments
Charlier, Erwin
June 2001, Volume 11, Number 1, Pages 55 - 64
A prime factor in prepayment risk is the refinance incentive. It is typically approximated by the ratio of the coupon rate and the prevailing mortgage rate minus one. This article shows that this is a very poor approximation for a wide range of relevant cases. Loan-level data can be used to compute the refinance incentive precisely, without making any approximations. Even in the presence of prepayment penalties, losses from prepayments due to refinancing can be substantial when measured in terms of market value.
Local versus Foreign Currency Ratings: What Determines Sovereign Transfer Risk?
Thomas, Stephen ; Trevino, Lourdes
June 2001, Volume 11, Number 1, Pages 65 - 76
The authors examine the statistical determinants of transfer risk using probit estimation and an extensive data set of over 300 sovereign ratings given by the leading rating agencies between 1992 and 1997. Both macroeconomic and balance sheet variables are found to be important, and regional and rating agency biases are present. The models both within and out-of-sample perform well and produce a close relationship with the variables predicting currency crises.
Term Structure Estimation in Illiquid Markets
Subramanian, K. V.
June 2001, Volume 11, Number 1, Pages 77 - 86
Government debt markets in the developing economies are generally less liquid than in developed ones. There are many fewer liquid on the run securities. Yield curve estimation must therefore include illiquid securities in the data set. Pooling liquid and illiquid securities to estimate the term structure leads to errors in the estimation methodology. The author suggests a method to circumvent this problem, proposing the use of liquidity-weighted objective functions for parameter estimation. The liquidity of individual securities is modeled using observable quantities like number and volume of trades in a security. The model is demonstrated using data from the Indian government bond market.
Editor\'s Letter
The best of its original, market-leading articles for Practitioners - by Practitioners and Academics
A Capital Markets View of Mortgage Servicing Rights
Aldrich, Simon; Greenberg, William; Payner, Brook
Abstract | Full Text (PDF)
Vol. 11, No. 1
How Much Mortgage Pool Information Do Investors Need?
Bennett, Paul; Peach, Richard; Peristiani, Stavros
Abstract | Full Text (PDF)
Vol. 11, No. 1
Estimating the Term Structure of Interest Rate Volatility in Extreme Values
Neftci, Salih; Bali, Turan
Abstract | Full Text (PDF)
Vol. 10, No. 4
Common Volatility in MBS Returns: A Factory GARCH Approach
Koutmos, Gregory
Abstract | Full Text (PDF)
Vol. 10, No. 4
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