Structural Default Modeling: A Hybrid Based Approach

Abstract

This article discusses the use of mortgage-backed securities and fixed-income derivatives analytics in order to model agency mortgage real estate investment trust (REIT) holdings in more detail than standard equity market practice. The author shows that book value projections derived from a full bottom-up modeling approach are quite accurate. He also computes such metrics as duration, convexity, and basis risk of mortgage REITs, and suggests hedging strategies. Finally the author explores performance attribution and how to fundamentally explain the large yields observed on these stocks.