Recent content by MoralHazard

A 30 yr T-bond should always trade "near" par (barring big rate jumps) since it is, by definition, on-the-run. Perhaps you want to follow a bond that once was a 30-year through time? Just discount the remaining payments by the evolving spot rate curve. Google "Fred II" (=St Louis Fed...

Thanks, a lot of stuff there. The innovations can be conditionally Gaussian (or not), and nowhere did I say the unconditional distribution is Gaussian. See my other coments in reply a point by nonprophet. The tails in the unconditional distribution and autocorrelation in the innovation^2 (and...

Seems to me that that's roughly what I was saying. Explain to me why I don't understand the concept of "forecasting volatility."

Useful post. I have not searched, but will. ATM IV from a Gauss fit would certainly match ATM IV from a GARCH model if the tails were tossed out (assuming they are in fact fatter); you add the caveat about fear and greed. Do you know of any studies on indiviudual stocks?

I agree that perhaps you don't need it: the derivative's worth whatever two people agree upon at that instant (with their information set). Derivatives are just another way to transfer risk. End of story? In a BS world, the writer does not have to agree with the buyer on probabilities for...

Dunno, but if the underlying really does exhibt GARCH effects, and the masses price it like a log-normal, you can take their money because you know when it's over- or under-priced? (in some expected sense, of course) GARCH effects can fatten tails, with a thinner "body" of the distribution of...

Curious why you say this.

Cutting ties completely also means you can no longer force them to confine business to residential mortgages, etc. Eventually they'll just be another Citibank, right? And they can decide to get out of the MBS-guarantee business alltogether. Big bonus for other banks, but home owners will lose...

Agree on the first para, but also add that I think most guys below the very top are very very good and very very honest. Also, the shenanigans *were* "caught" - kudos. ceo's at fully private cos pull this stuff, too. Second para - don't you think are more gentle approach (for now?) might be...

Yes, but what's in their MBS? A previous poster brought up the question of ARMs.

Someone correct me, but most of the retained portfolio consists of fixed rate mortgages, pooled as their own MBS. So ignore ARMs. Suppose you have $10 in fixed rate mortgages, with a WAC of 10%. They're typically 30year, ie a duration around 6-10 yrs. You issue 1 year debt at 9%, and add 25c...

MV of assets drops, cost of debt not as much - they're typically short-funded, but try to keep the duration gap at 6 months or less. D/V is about 2.5%. Problem is probably not a bunch of small, slow increases (can dynamically hedge) but the big jumps since they're short convexity. Static hedges...

Agreed... credit risk is less of a problem in a systemic way (though, who knows) than prepayment and interest rate risk. The problem with the latter is that they synthetically lengthen the duration of their debt and in a crisis the question is whether they'll find enough counterparties. Why not...

Those are market forces, right? GSEs claim to hedge well, but don't use static hedges (though FRE is moving that way, I believe) precisely because of what you say. Then again, why should they as long as there's no regulatory pressure? They're acting like economically rational firms in the face...

Got it. Increased credit risk for banks (I don't think GSEs buy ARMs) is also a problem that might result from a GSE collapse (via the effect on house prices and a generally depressed economy). [edit: I think the thread is more geared to the question of mortgagee bankruptcy due to interest rate...