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One of the lessons of the credit crisis of 2007-2010 was that the conventional wisdom can be a dangerous thing.  The conventional wisdom in early 2006 said that “home prices in the United States do not go down” and that the copula method was an accurate method for valuing tranches of collateralized debt obligations.  Another complex security valuation issue is becoming increasingly important: the valuation of mortgage servicing rights.  This blog talks about potential modeling risks in the conventional wisdom for valuing mortgage servicing rights and how to deal with those risks.

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Today’s forecast for U.S. Treasury yields is based on the December 1, 2011 constant maturity Treasury yields that were reported by the Board of Governors of the Federal Reserve System in its H15 Statistical Release at 4:15 pm December 2, 2011. The “forecast” is the implied future coupon bearing U.S. Treasury yields derived using the maximum smoothness forward rate smoothing approach developed by Adams and van Deventer (Journal of Fixed Income, 1994) and corrected in van Deventer and Imai, Financial Risk Analytics (1996). For an electronic delivery of this interest rate data in Kamakura Risk Manager table format, please subscribe via info@kamakuraco.com.

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Today’s forecast for U.S. Treasury yields is based on the November 23, 2011 constant maturity Treasury yields that were reported by the Board of Governors of the Federal Reserve System in its H15 Statistical Release at 4:15 pm November 25, 2011 because interest rate data was not available for November 24 due to the holiday. The “forecast” is the implied future coupon bearing U.S. Treasury yields derived using the maximum smoothness forward rate smoothing approach developed by Adams and van Deventer (Journal of Fixed Income, 1994) and corrected in van Deventer and Imai, Financial Risk Analytics (1996). For an electronic delivery of this interest rate data in Kamakura Risk Manager table format, please subscribe via info@kamakuraco.com.

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In our blog of November 7, 2011, we showed that the one–factor term structure models in wide use in the financial services business for interest rate management analytics were consistent with actual daily movements of the U.S. Treasury curve less than 38% of 12,286 business days since 1962.  In this blog, we repeat the analysis on the Libor-swap curve and reach an even more devastating conclusion: once the full interest rate swap curve came into view in 1988, daily yield curve shifts were consistent with one factor models less than 8% of the time.  This blog explains how we arrived at those conclusions.

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Today’s forecast for U.S. Treasury yields is based on the November 17, 2011 constant maturity Treasury yields that were reported by the Board of Governors of the Federal Reserve System in its H15 Statistical Release at 4:15 pm November 18, 2011. The “forecast” is the implied future coupon bearing U.S. Treasury yields derived using the maximum smoothness forward rate smoothing approach developed by Adams and van Deventer (Journal of Fixed Income, 1994) and corrected in van Deventer and Imai, Financial Risk Analytics (1996). For an electronic delivery of this interest rate data in Kamakura Risk Manager table format, please subscribe via info@kamakuraco.com.

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