Valuation of mortgage-backed securities

This paper attempts to provide a method for the valuation of mortgage-backed securities (MBS). Specifically, Modified Goldman Sachs model is selected to describe mortgagors' prepayment behaviour, which takes account of mortgage's refinancing incentive, aging effect, month effect and burnout effect. In this study, I will use above model to price a pass-through MBS and a plain vanilla MBS respectively. Furthermore, I use scenarios testing to discuss how MBS’s price and standard deviation (risk) change if mortgage property and model parameters change.