Structured finance securities option pricing architecture and process

A system for valuing a structured finance product based on loans, the loans characterized by probabilities of default and prepayment, the system comprising:

• at least one processor;
• at least one non-transitory computer readable medium having computer executable code embodied therein, said computer executable code causes said at least one processor to:
• obtain, from a database, data for a structured finance product;
• said data comprising historical and current market and loan information;
• determine, utilizing the data and hazard rates estimated from the data, statistical probabilities of default and prepayment on loans that serve as collateral for a collection of structured finance notes in a trust for the structured finance product;
• each of the statistical probabilities of default and prepayment being proportional to an intensity of a stochastic Cox process;
• obtaining the statistical probabilities of default and prepayment comprises including at least one of credit risk, default or prepayment risk;
• the credit risk and prepayment risk being modeled using a reduced form methodology;
• obtain, utilizing the statistical probabilities, and the data, a statistically significant number of cashflow data for each loan, wherein the number of cashflow data results in a standard error from a mean of a distribution of cashflows being statistically small;
• cashflow data being obtained by analysis of other stochastic processes;
• the other stochastic processes include interest rate risk modeled using a Heath, Jarrow, Morton (HJM) model augmented by an expression for the evolution of constant maturity zero coupon bonds, constituting an augmented HJM model;
• using a statistically significant number of paths over a time period, each path generated under a martingale measure, estimating hazard rates, determining interest rate, using the augmented HJM model, and determining default or prepayment at predetermined intervals in the time period;
• said cashflows being obtained from valuation expressions for Cox processes evaluated using Monte Carlo simulations;
• the Monte Carlo simulations including interaction with a structured finance product pricing system at each predetermined interval;
• the structured finance product pricing system allocating loans into tranches;
• generate, utilizing the data, a number of predicted interest rate and loan value paths, thereby generating an econometric model;
• outputs of the econometric model include interest rates;
• and
• determine, utilizing the data, the econometric model, and the statistical cashflow information, a valuation for the structured finance product, said valuation comprising a fair value;
• said valuation obtained using the cashflows obtained from valuation expressions for Cox processes evaluated using the Monte Carlo simulations.

A non-transitory computer readable medium having computer executable code embodied therein, said computer executable code causing at least one processor to:

• obtain, from a database, data for a structured finance product based on loans, the loans characterized by probabilities of default and prepayment, said data comprising historical and current market information and historical and current loan information;
• determine, utilizing the data and hazard rates estimated from the data, statistical probabilities of default and prepayment on loans that serve as collateral for a collection of structured finance notes in a trust for the structured finance product;
• each of the statistical probabilities of default and prepayment being proportional to an intensity of a stochastic Cox process;
• obtaining the statistical probabilities of default and prepayment comprises including at least one of credit risk, default or prepayment risk;
• the credit risk and prepayment risk being modeled using a reduced form methodology;
• obtain, utilizing the statistical probabilities, and the data, a statistically significant number of cashflow data for each loan, wherein the number of cashflow data results in a standard error from a mean of a distribution of cashflows being statistically small;
• cashflow data being obtained by analysis of other stochastic processes;
• the other stochastic processes include interest rate risk modeled using a Heath, Jarrow, Morton (HJM) model augmented by an expression for the evolution of constant maturity zero coupon bonds, constituting an augmented HJM model;
• using a statistically significant number of paths over a time period, each path generated under a martingale measure, estimating hazard rates, determining interest rate, using the augmented HJM model, and determining default or prepayment at predetermined intervals in the time period;
• said cashflows being obtained from valuation expressions for Cox processes evaluated using Monte Carlo simulations;
• the Monte Carlo simulations including interaction with a structured finance product pricing system at each predetermined interval;
• the structured finance product pricing system allocating loans into tranches;
• generate, utilizing the data, a number of predicted interest rate and loan value paths, thereby generating an econometric model;
• outputs of the econometric model include interest rates;
• and
• determine, utilizing the data, the econometric model, and the statistical cashflow information, a valuation for the structured finance product, said valuation comprising a fair value;
• said valuation obtained using the cashflows obtained from valuation expressions for Cox processes evaluated using the Monte Carlo simulations.

A computer implemented method for valuing a structured finance product based on loans, the loans characterized by probabilities of default and prepayment, the method comprising the steps of:

• obtaining, from a database, data for a structured finance product;
• said data comprising historical market and loan information and current market and loan information;
• determining, utilizing the data and hazard rates estimated from the data, statistical probabilities of at least one of default or prepayment on loans that serve as collateral for a collection of structured finance notes in a trust for the structured finance product;
• each of the statistical probabilities of said at least one of default or prepayment being proportional to an intensity of a stochastic Cox process;
• obtaining the statistical probabilities of said at least one of default or prepayment comprises including at least one of credit risk, default or prepayment risk;
• the credit risk and prepayment risk being modeled using a reduced form methodology;
• obtaining, utilizing the statistical probabilities, and the data, a statistically significant number of cashflow data for each loan, wherein the number of cashflow data results in a standard error from a mean of a distribution of cashflows being statistically small;
• cashflow data being obtained by analysis of other stochastic processes;
• the other stochastic processes include interest rate risk modeled using a Heath, Jarrow, Morton (HJM) model augmented by an expression for the evolution of constant maturity zero coupon bonds, constituting an augmented HJM model;
• using a statistically significant number of paths over a time period, each path generated under a martingale measure, estimating hazard rates, determining interest rate, using the augmented HJM model, and determining default or prepayment at predetermined intervals in the time period;
• said cashflows being obtained from valuation expressions for Cox processes evaluated using Monte Carlo simulations;
• the Monte Carlo simulations including interaction with a structured finance product pricing system at each predetermined interval;
• the structured finance product pricing system allocating loans into tranches;
• generating, utilizing the data, corresponding number of predicted interest rate and loan value paths, thereby generating an econometric model;
• outputs of the econometric model include interest rates;
• and
• determining, utilizing the data, the econometric model, and the statistical cashflow information, a valuation for the structured finance product, said valuation comprising a fair value;
• said valuation obtained using the cashflows obtained from valuation expressions for Cox processes evaluated using the Monte Carlo simulations;
• wherein the steps of obtaining, from a database, data, determining, utilizing the data, statistical probabilities of at least one of default and prepayment, generating, utilizing the data, a corresponding number of predicted interest rate and loan value paths, and determining, utilizing the data, the econometric model, and the statistical cashflow information, a valuation are performed by one or more processors executing computer readable code embodied in non-transitory computer usable media.

A system for valuing a structured finance product based on loans, the loans characterized by probabilities of default and prepayment, the system comprising:

• at least one processor;
• at least one non-transitory computer readable medium having computer executable code embodied therein, said computer executable code causes said at least one processor to:
• obtain, from a database, data for a structured finance product;
• said data comprising historical and current market and loan information;
• determine, utilizing the data and hazard rates estimated from the data, statistical probabilities of at least one of default or prepayment on loans that serve as collateral for a collection of structured finance notes in a trust for the structured finance product;
• each of the statistical probabilities of said at least one of default or prepayment being proportional to an intensity of a stochastic Cox process;
• obtaining the statistical probabilities of default and prepayment comprises including at least one of credit risk, default or prepayment risk;
• the credit risk and prepayment risk being modeled using a reduced form methodology;
• obtain, utilizing the statistical probabilities, and the data, a statistically significant number of cashflow data for each loan, wherein the number of cashflow data results in a standard error from a mean of a distribution of cashflows being statistically small;
• cashflow data being obtained by analysis of other stochastic processes;
• the other stochastic processes include interest rate risk modeled using a Heath, Jarrow, Morton (HJM) model augmented by an expression for the evolution of constant maturity zero coupon bonds, constituting an augmented HJM model;
• using a statistically significant number of paths over a time period, each path generated under a martingale measure, estimating hazard rates, determining interest rate, using the augmented HJM model, and determining default or repayment at predetermined intervals in the time period;
• said cashflows being obtained from valuation expressions for Cox processes evaluated using Monte Carlo simulations;
• the Monte Carlo simulations including interaction with a structured finance product pricing system at each predetermined interval;
• the structured finance product pricing system allocating loans into tranches;
• generate, utilizing the data, a corresponding number of predicted interest rate and loan value paths, thereby generating an econometric model;
• outputs of the econometric model include interest rates;
• and
• determine, utilizing the data, the econometric model, and the statistical cashflow information, a valuation for the structured finance product, said valuation comprising a fair value;
• said cashflows being obtained from valuation expressions for Cox processes evaluated using Monte Carlo simulations.