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Optimal Portfolios with Mortgage-backed Securities

Author

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  • Elena Bernhardt
  • Andreas Kolbe
  • Rudi Zagst

Abstract

Executive Summary. In this paper we consider portfolio optimization problems based on simulated scenarios and extend their usual application by including prepayment-sensitive fixed-rate agency mortgage-backed securities (MBS) into the universe of available assets. This has become feasible due to recent closed-form approximation approaches for the pricing of MBS, which have long been neglected in modern portfolio optimization applications due to the computational burden. In an empirical case study we show that an optimal asset allocation strategy with MBS is indeed able to substantially outperform strategies based on stocks and regular bonds only.

Suggested Citation

  • Elena Bernhardt & Andreas Kolbe & Rudi Zagst, 2013. "Optimal Portfolios with Mortgage-backed Securities," Journal of Real Estate Portfolio Management, Taylor & Francis Journals, vol. 19(2), pages 121-136, January.
    • Handle: RePEc:taf:repmxx:v:19:y:2013:i:2:p:121-136
    DOI: 10.1080/10835547.2013.12089949
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