Boyarchenko, Nina; Fuster, Andreas; Lucca, David O. - 2014
to option-adjusted spreads. With this pricing model, we find that prepayment model risk explains the smile, while the … prepayment option show a pronounced smile with respect to the MBS coupon. We propose prepayment model risk as a candidate driver … of MBS spreads and present a new pricing model that uses "stripped" MBS prices to identify the contribution of this risk …