Journal of Risk

Efficient execution in the secondary mortgage market: a stochastic optimization model using CVaR constraints

Chung-Jui Wang, Stan Uryasev


Efficient execution is a significant task faced by mortgage bankers attempting to profit from the secondary market. The challenge of efficient execution is to sell or securitize a large number of heterogeneous mortgages in the secondary market in order to maximize expected revenue under a risk tolerance. This paper develops a stochastic optimization model to perform efficient execution that considers secondary marketing functionality including loan-level efficient execution, guarantee fee buy-up or buy-down, servicing retain or release and excess servicing fee. Since efficient execution involves random cashflows, lenders must maintain a balance between expected revenue and risk. We employ a conditional value-at-risk (CVaR) risk measure in this efficient execution model that maximizes expected revenue under a CVaR constraint. By solving the efficient execution problem under different risk tolerances specified by a CVaR constraint, an efficient frontier could be found. The model is formulated as a mixed 0–1 linear programming problem. A case study shows that realistic instances of the efficient execution problem can be solved in acceptable time (approximately one minute) with the CPLEX-90 solver on a PC.

Sorry, our subscription options are not loading right now

Please try again later. Get in touch with our customer services team if this issue persists.

New to View our subscription options

You need to sign in to use this feature. If you don’t have a account, please register for a trial.

Sign in
You are currently on corporate access.

To use this feature you will need an individual account. If you have one already please sign in.

Sign in.

Alternatively you can request an individual account here