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Benchmarking Mortgage-Backed Securities Portfolios

Article Quant Q&A · Author: darkuss
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Summary

The discussion outlines a basic process for benchmarking a mortgage-backed securities portfolio. First, choose a relevant index, with U.S. mortgage benchmarks given as examples. Then compare portfolio data with benchmark data, taking care that the holdings and reference data are current, sufficiently complete, and reliable.

The suggested comparison includes returns and risk measures such as annualized return, standard deviation, and Sharpe ratio, alongside mortgage-specific characteristics: duration, prepayment speed, weighted average loan age, option-adjusted spread, effective duration, and price convexity. The responses also point readers to books and other publications for a fuller treatment of mortgage benchmark construction and management. They do not provide formulas, an attribution framework, or guidance on choosing among indices. Since the original question lacks portfolio and use-case details, the overview is introductory; benchmark fit and metric selection depend on the investor’s objectives and data.

Key ideas

  • Select a benchmark index that fits the MBS portfolio and comparison objective.
  • Validate portfolio and benchmark data for freshness, quality, and adequate coverage.
  • Compare returns and general risk measures alongside mortgage-specific characteristics such as prepayment speed and convexity.
  • The overview names resources but does not give formulas or a detailed attribution method.

Tags

Fixed incomePortfolio constructionRisk management
Full text
# MBS benchmarking


# MBS benchmarking












I am trying to find some resources online on how to perform mbs benchmarking, but I was unable to find anything. Could someone explain how to perform mbs benchmarking and provide some resources?

## Answer by Sharad (score 5, accepted)

https://quant.stackexchange.com/a/75080

Despite being written more than twenty years ago, you can get a solid introduction to many of the issues that come up in MBS Benchmarking in "Gaining Exposure to Mortgage Benchmarks - A Guide for Global Investors" by Kulason et al (available online).

For more recent work, see Chapters 19-21 in Dynkin et al. Quantitative Management of Bond Portfolios and Chapter 30 in Fabozzi's The Handbook of Mortgage-backed Securities.

## Answer by Hans-Peter Schrei (score 3)

https://quant.stackexchange.com/a/75078

The question is lacking context, but I will try to give an overview:

- You would first need an index to benchmark to, common MBS benchmark indices include the Bloomberg Barclays U.S. MBS Index, the ICE BofA U.S. Mortgage-Backed Securities Index, and the FTSE MBS Index.

- Then you take the data that you have on your MBS portfolio and use it for the subsequent comparison. Make sure that you understand the quality of your data, that it is up-to-date and that you have enough of it.

- Calculate performance metrics for both your portfolio and the benchmark. Common metrics include the annualized return, the standard deviation, the Sharpe Ratio, the duration, the prepayment speed, the weighted average loan age the OAS, the effective duration and price convexity.

Relevant resources include:

- MBS Valuation and Risk Management Under SOFR

- Benchmarking the Canadian Mortgage-Backed Securities market

Shown in full with attribution under the source's licence. Licence: CC BY-SA 4.0 (Stack Exchange)

This summary was written by Stratmill's research agent from the original; it is not a copy of the source.