Alternative margin models for mortgage-backed securities

Most US mortgages are traded in the form of mortgage -backed securities (MBSs) guaranteed by the US government -sponsored enterprises Fannie Mae and Freddie Mac and the government agency Ginnie Mae. A significant portion of agency MBSs trading occurs in the to -be -announced forward market. Yet, the existing margin models for TBA/MBSs mostly rely on mortgage model suites such as interest rate, prepayment and potentially other macroeconomic models, which makes the modeling process intrinsically complicated from both a model risk perspective and an operational risk perspective. In addition to these complexities, dynamics in the housing market, changes to mortgage regulatory regimes and governmental interventions always make mortgage modeling a challenge (as evidenced historically). In this paper, we conduct a study of margin models for to -be -announced MBSs using common margin frameworks for market risk such as the generalized autoregressive conditional heteroscedasticity (GARCH) t -copula and filtered historical simulation approaches. These are commonly used for other asset classes such as credit default swaps and equity -based markets but have not been widely used in the MBSs market. Such econometric models, which rely solely on market volatility and price return behavior, could potentially be used as a supplemental model framework for to -be -announced MBS margin and stress testing purposes.