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Abstract
This article describes a stochastic home price appreciation (HPA) model that can be used to obtain random paths of simulated home prices that are consistent with historical behavior and with market-implied HPA. The stochastic HPA model has been integrated with Citi’s prepayment, default, term structure, and MOATS models and can be used to calculate credit-adjusted option-adjusted spread (OAS) for non-agency mortgage-backed securities and loans. The credit-adjusted OAS model is available to users via the Yield Book.
TOPICS: MBS and residential mortgage loans, credit risk management, factor-based models
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