Mortgage-Backed Securities and Collateralized Debt Obligations


Cornerstone Research staff and experts bring extensive expertise to the analysis and valuation of structured debt instruments and their derivatives.

Mortgage-backed securities (MBS), asset-backed collateralized debt obligations (CDOs), credit default swaps (CDS), and other related structured finance securities have been at the center of the subprime mortgage litigation wave. For a number of reasons, it can be challenging to value these financial instruments:

  • They often trade infrequently and privately, and it can be difficult to observe a market price.
  • The potential illiquidity of a particular instrument at a given time can have an impact on its value.
  • Values vary with the credit risk, prepayment risk, interest rate sensitivity, and optionality of the underlying loans and bonds.
  • Values are highly dependent on, and sensitive to, the valuation models and modeling assumptions used.

Cornerstone Research has consulted on multiple cases involving the market dynamics, information sources, and derivative pricing methods relevant to valuing these instruments. For example, we have worked with Professor Michael Gibbons of the Wharton School, Professor René Stulz of The Ohio State University, and Professor Erik Sirri of Babson College to assess the pricing of bond and loan assets purchased to create CDO pools, as well as the pricing, hedging, and performance of CDOs.

We have also worked with experts to value residential and commercial MBS using various techniques. We have developed cash flow projections for residential and commercial MBS, and valued MBS using discounted cash flow analysis. In addition, we have used Monte Carlo simulations, a statistical technique that generates expected returns for securities.

Case Experts

Michael R. Gibbons

I. W. Burnham II Professor of Investment Banking,
The Wharton School,
University of Pennsylvania

René M. Stulz

Everett D. Reese Chair of Banking and Monetary Economics,
Director, Dice Center for Research in Financial Economics,
Fisher College of Business,
The Ohio State University

Erik R. Sirri

Professor of Finance, Babson College;
Former Director, SEC Division of Trading and Markets;
Senior Advisor, Cornerstone Research