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Market-Implied Losses and Non-Agency Subordinated MBS

Author

Listed:
  • Laurent Gauthier

    (LED - Laboratoire d'Economie Dionysien - UP8 - Université Paris 8 Vincennes-Saint-Denis)

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.

Suggested Citation

  • Laurent Gauthier, 2003. "Market-Implied Losses and Non-Agency Subordinated MBS," Post-Print hal-04328853, HAL.
    • Handle: RePEc:hal:journl:hal-04328853
    DOI: 10.3905/jfi.2003.319346
    as

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