# US 8,788,404 B1 · Structured finance securities option pricing architecture and process > Agents: this data is available as JSON from the patentgrep API and MCP server — see https://patentgrep.com/llms.txt - Number: US 8,788,404 B1 - Document ID: US8788404B1 - Status: Granted - Kind: B1 - Application number: 13/462,469 - Filed: 2012-05-02 - Granted: 2014-07-22 - Earliest claimed: 2003-12-11 - Assignees: Cornell Research Foundation, Inc.; Wotn, LLC - Applicants: Andreas D. Christopolous; Robert A. Jarrow; Joshua G. Barratt; Shirish Chinchalkar; Thomas F. Coleman; Abram D. Connelly; Daniel C. Ilut; Tibor Janosi; Yohan Kim; Yildiray Yildirim; Mark A. Zifchock - Inventors: Andreas D. Christopolous; Robert A. Jarrow; Joshua G. Barratt; Shirish Chinchalkar; Thomas F. Coleman; Abram D. Connelly; Daniel C. Ilut; Tibor Janosi; Yohan Kim; Yildiray Yildirim; Mark A. Zifchock - Web page: https://patentgrep.com/patent/US8788404B1 ## CPC - G06Q 40/00: Finance; Insurance; Tax strategies; Processing of corporate or income taxes - G06Q 40/03: Credit; Loans; Processing thereof - G06Q 40/06: Asset management; Financial planning or analysis - G06Q: INFORMATION AND COMMUNICATION TECHNOLOGY [ICT] SPECIALLY ADAPTED FOR ADMINISTRATIVE, COMMERCIAL, FINANCIAL, MANAGERIAL OR SUPERVISORY PURPOSES; SYSTEMS OR METHODS SPECIALLY ADAPTED FOR ADMINISTRATIVE, COMMERCIAL, FINANCIAL, MANAGERIAL OR SUPERVISORY PURPOSES, NOT OTHERWISE PROVIDED FOR ## Abstract A method and system for valuing structured-finance securities, such as, but not limited to, commercial mortgage-backed securities (CMBS). ## Claims ### Claim 1 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 based on loans, 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 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 credit risk, default risk and 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 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, a 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 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. ### Claim 2 (depends on 1) The computer implemented method of claim 1 further comprising the step of determining, utilizing the statistical cashflow information and the valuation, updated data for the structured finance product; and updating a database by including the updated data. ### Claim 3 (depends on 1) The computer implemented method of claim 1 wherein the structured finance product is at least one of Commercial Mortgage Backed Securities (CMBS) or Commercial Real Estate Loans (CRELs); and wherein said data comprises property values and property indices. ### Claim 4 (depends on 1) The computer implemented method of claim 1 wherein the prepayment risk is described using a risk hazard rate procedure. ### Claim 5 (depends on 1) The computer implemented method of claim 1 wherein the default risk is described using a risk hazard rate procedure. ### Claim 6 (depends on 1) The computer implemented method of claim 1 wherein the structured finance product is at least one of Commercial Mortgage Backed Securities (CMBS) or Commercial Real Estate Loans (CRELs); and wherein said data comprises property values and property indices. ### Claim 7 (depends on 1) The computer implemented method of claim 1 wherein the prepayment risk is described using a risk hazard rate procedure. ### Claim 8 (depends on 1) The computer implemented method of claim 1 wherein the default risk is described using a risk hazard rate procedure. ### Claim 9 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. ### Claim 10 (depends on 3) The system of claim 3 wherein the computer executable code also causes said at least one processor to: determine, utilizing the statistical cashflow information and the valuation, updated data for the structured finance product; and update a database by including the updated data. ### Claim 11 (depends on 3) The system of claim 3 wherein said computer executable code in causing said at least one processor to determine the valuation, causes said at least one processor to determine a valuation comprising risk ratings in lieu of a fair value. ### Claim 12 (depends on 5) The system of claim 5 wherein the structured finance product is at least one of Commercial Mortgage Backed Securities (CMBS) or Commercial Real Estate Loans (CRELs); and wherein said data comprises property values and property indices. ### Claim 13 (depends on 3) The system of claim 3 wherein the default risk is described using a risk hazard rate procedure. ### Claim 14 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. ### Claim 15 (depends on 6) The non-transitory computer readable medium of claim 6 wherein the computer executable code also causes said at least one processor to: determine, utilizing the statistical cashflow information and the valuation updated data for the structured finance product; and update a database by including the updated data. ### Claim 16 (depends on 6) The non-transitory computer readable medium of claim 6 wherein said computer executable code in causing said at least one processor to determine the valuation, causes said at least one processor to determine a valuation comprising risk ratings in lieu of the fair value. ### Claim 17 (depends on 6) The non-transitory computer readable medium of claim 6 wherein said computer executable code in causing said at least one processor to determine the valuation, causes said at least one processor to determine a valuation also comprising at least one measure of risk. ### Claim 18 (depends on 6) The non-transitory computer readable medium of claim 6 wherein the structured finance product is at least one of Commercial Mortgage Backed Securities (CMBS) or Commercial Real Estate Loans (CRELs); and wherein said data comprises property values and property indices. ### Claim 19 (depends on 6) The non-transitory computer readable medium of claim 6 wherein the prepayment risk is described using a risk hazard rate procedure. ### Claim 20 (depends on 6) The non-transitory computer readable medium of claim 6 wherein the default risk is described using a risk hazard rate procedure. ### Claim 21 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. ### Claim 22 (depends on 21) The computer implemented method of claim 21 wherein the prepayment risk is described using a risk hazard rate procedure. ### Claim 23 (depends on 21) The computer implemented method of claim 21 wherein the default risk is described using a risk hazard rate procedure. ### Claim 24 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. ### Claim 25 (depends on 24) The system of claim 24 wherein the computer executable code also causes said at least one processor to: determine, utilizing the statistical cashflow information and the valuation, updated data for the structured finance product; and update a database by including the updated data. ### Claim 26 (depends on 24) The system of claim 24 wherein the prepayment risk is described using a risk hazard rate procedure. ### Claim 27 (depends on 24) The system of claim 24 wherein the default risk is described using a risk hazard rate procedure.