The MBB Risk Engine is a quantitative tool designed to analyze callable mortgage-backed bonds. It allows users to calculate theoretical bond values, option-adjusted spreads (OAS), first- and second-order interest rate sensitivities (BPV and convexity), and perform scenario analysis. This tool is intended for financial analysts, risk managers, institutional investors, and other professionals involved in bond valuation and prepayment modeling.
Key Capabilities
- Theoretical bond valuation under stochastic interest rates and prepayment uncertainty.
- Option-adjusted spread (OAS) estimation using a numerical solution approach.
- BPV and convexity calculations for interest rate risk assessment.
- Scenario analysis based on custom yield curve shifts.
- Prepayment model calibrated using Danish mortgage bond data.
Methodology
The MBB Risk Engine is built upon robust quantitative methods:
- Prepayment Model: Estimated using Danish prepayment data from January 2016 to January 2024 with Quasi Maximum Likelihood estimation.
- Interest Rate Model: Mean-reverting process for yield curve dynamics.
- Numerical Solution: Path-dependent valuation techniques to capture prepayment uncertainty.
Development and Expertise
The MBB Risk Engine was developed by Niels Rom, author of the book Callable Mortgage Bonds: Pricing, Risk, and Prepayment Modeling (Springer, 2025). The tool reflects best practices from both industry and academic research, providing a general approach to the valuation of callable mortgage-backed bonds.
For an in-depth discussion of the financial and mathematical models underlying the tool, see the book on Springer.
Limitations & Disclaimer
While the MBB Risk Engine applies rigorous modeling techniques, bond valuations depend on assumptions about future interest rates and prepayment behavior. Results should be interpreted as model-based estimates, not guarantees. Please see the Disclaimer for more details.