Abstract
characteristics of subprime loans, we aim to shed light on four MBS pricing-related issues: (1) estimating the probabilities of default from typical prime vs. subprime mortgage loans as the collaterals; (2) specifying the optimal sizing rules (i.e., share of subordinate tranches) in pooling mortgages of different characteristics to create MBS (Mortgage Backed Security) deals; (3) demonstrating an informationally-efficient method to estimate the credit-OAS (Option Adjusted Spread) and its application in referring elative values?of different CDO tranches; and, (4) discussing policy implications in coming up with risk-based capital charges in the deal/tranche level. We outline our research framework in this draft, which will be finalized long before the 2009 AREUEA Annual Conference.