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You have already said that the negative KRD is not unusual, given that your are looking at an MBS, I recall a very lengthy discussion on a related matter elsewhere which I assume does not need to be repeated here. I know very little about MBS in general and cannot look at details on the particular issue. However, given that you are looking at KRD you are ...


If I am not mistaken, the Feynman-Kac formula is related to the Kolmogorov's backward equation, so I would expect it to be available only for Markov processes. Diffusions are usually of Markovian type, in contrast to general Ito processes or more to say, general semimartinagales. Intuitively, the PDE/PIDE/... will describe the dynamics of ...

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