Whats my illiquid structured finance bond worth?
” Oh my. Whether residential mortgage, commercial mortgage, or asset-backed, that depends a lot upon future loss activity across the whole financial sector. Typically I only get this question when the bond is worth little, but the entity thinks it is worth a lot, but can’t get a bid anywhere near that. Often they have been misled by third-party pricing services doing a facile job in exchange for a fee. “How will this equity portfolio behave versus the market?” Ugh. Beta is unstable, and estimates often lead to erroneous conclusions. More detailed modeling can come up with a reasonable answer, but also state that the correct beta is a weak tendency, and is swamped by other effects. “This investment will eventually come back, right?” No. Most will, but not all will. Some do go to zero, or something really close. Mean-reversion exists in the markets, and over long time periods it is strong on average, but in specific over short horizons it does not work. “What’s the interest rate sensitiv
