Mortgage-Backed Securities in a Strategic Asset Allocation Framework

Abstract

To perform robust asset allocation analysis, investors need reliable quantitative models to assess the expected risk and return profile of the asset classes and sectors that may become constituents of the strategic asset mix. This Chapter has been written for fixed income investors who would like to consider a strategic asset allocation to agency guaranteed mortgages (MBS) in their portfolios. Within the US high grade fixed income universe, the largest sector is the MBS sector, comprising close to 40% of the universe. So a reliable asset class model for MBS should be useful to a significant number of fixed income investors. In fact, this Chapter should be relevant for multiasset investors as well, who may consider US high grade fixed income simply as one asset class among others, like equities or real estate. In their case, MBS by definition receives a near 40% weight within their fixed income allocation, so it is beneficial for them to be able to reliably model the behaviour of the MBS sector.KeywordsYield CurveExcess ReturnAsset AllocationTotal ReturnPrice ReturnThese keywords were added by machine and not by the authors. This process is experimental and the keywords may be updated as the learning algorithm improves.