Main category
Economics (General Management)
Abstract
The VRM MBS calculator treats conversions using a constant annualized conversion rate that is applied as a monthly mortality rate. This treatment of conversions ignores the impact of ageing, seasonality and interest rate volatility. However, since the VRM coupon resets each month, we expect ageing/seasonality/ interest rate volatility to impact the price marginally; therefore, the extra spread to be paid to investors because of the early principal payment, especially due to interest rate volatility, is marginal as well.
Further reading
https://ia904700.us.archive.org/2/items/variableMbsValuation/variableMbsValuation.pdf
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