Boyarchenko, Nina; Fuster, Andreas; Lucca, David O. - Federal Reserve Bank of New York - 2014
prepayment option show a pronounced smile with respect to the MBS coupon. We propose prepayment model risk as a candidate driver … to option-adjusted spreads. With this pricing model, we find that prepayment model risk explains the smile, while the … variation in the time series is mostly accounted for by a non-prepayment-risk component, which is related to credit risk in …