A theoretical and numerical analysis of collateralized mortgage obligations

Abstract

This thesis approaches securitization of mortgage loans. In particular, the foremost objective of the thesis is to conduct a theoretical examination of Collateralized Mortgage Obligations (CMOs). The analysis of mortgages and mortgage-related securities gets complicated due to uncertainty concerning the amount and timing of the prepayment element of cash flows from mortgages. This thesis therefore examines how prepayments are dealt with in the valuation of such securities. The thesis also conducts a numerical illustration of the state-of-the-art valuation methodology – the Monte Carlo simulation model.