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A model for portfolio management with mortgage-backed securities

  • Section VI Stochastic Programming
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Abstract

We present a stochastic programming model for the management of large portfolios of mortgage-backed securities (abbreviated: MBS). It is a two-stage, multiperiod model, whereby portfolio decisions made here-and-now are influenced by uncertain information about the future. In particular, we consider uncertainty in both the prepayment activity of the MBSs in the portfolio, as well as uncertainty about the future reinvestment rates. A simulation procedure is used to generate interest rate paths and prepayment behavior, and the stochastic program can be extremely large. Solution of the resulting large-scale programs is particularly challenging. We show that with massively parallel computing technology, the proposed models are indeed solvable. Empirical results on a Connection Machine CM-2 are reported.

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Authors and Affiliations

  1. Hermes Laboratory for Financial Modeling and Simulation, Decision Sciences Department, The Wharton School, University of Pennsylvania, 19104, Philadelphia, PA, USA

    Stavors A. Zenios

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  1. Stavors A. Zenios
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The HERMES Laboratory was established by a grant from the Digital Equipment Corporation, and is funded in part by grants SES-91-00216 and CCR-881135 from the National Science Foundation and grant 91-0168 from the Air-Force Office of Scientific Research.

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Zenios, S.A. A model for portfolio management with mortgage-backed securities. Ann Oper Res 43, 337–356 (1993). https://doi.org/10.1007/BF02025090

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