ANDREW DAVIDSON & CO., INC. ENHANCES ITS LIBRARY OF TERM STRUCTURE
MODELS
New York City, October 8, 2002--Andrew Davidson & Co.,
Inc. is pleased to announce that their VectorsTM suite of analytical
tools has been expanded to include two new term structure models
specifically designed for the analysis of mortgage and asset backed
securities. Now, in addition to the recently enhanced Black Karasinski
model, the library also includes both a squared Gaussian and a Hull
White Model. These models have been fully integrated into the firm's
OAS subroutines.
A detailed examination of the implications of a prolonged period
of relatively low interest rates and implied volatility skew for
swaptions on the valuation of mortgage-backed securities led the
company to expand its selection of term structure models. Because
different interest rate environments warrant varied term structure
models, Andrew Davidson & Co., Inc. has responded by offering
a choice. Each of the available models is based on a different distribution
of interest rates over time; BK assumes lognormality; HW assumes
normality and SG assumes normal process squared (chi-squared distribution).
Depending upon the prevailing level and volatility of interest rates,
risk managers, traders and portfolio managers may now choose the
most appropriate model for the given interest rate environment.
All of the models, implemented on a lattice, now operate with time-dependent
volatility as well as with a constant one. They may be fit to the
observed volatility term structure for swaptions rather accurately
and quickly through the use of the calibration tools included with
the models.
Senior Consultant Alex Levin, who developed the enhanced term structure
library, remarks, "We expect that investors will appreciate
our strong and convenient volatility calibration tools. Along with
the standard absence of arbitrage, our model will assess value of
the embedded prepay option most accurately." Levin has written
an issue of Quantitative Perspectives, the company's publication,
detailing the research that justifies a proper selection of the
Interest Rate Model. The article, entitled "Interest Rate Modeling:
A Conscientious Choice," is now available on the Andrew Davidson
& Co., Inc. website at www.ad-co.com.
Andrew Davidson, the company's president and founder states, "Alex
Levin's work serves to keep our models at the forefront of mortgage
research and analysis. In the current rate environment, Hull-White
(normal distribution) and squared Gaussian models provide a better
fit to observed volatility patterns. We hope that analysts and investors
will evaluate these models and determine for themselves the benefit
of using the alternative volatility formulations for valuation and
risk management."
Andrew Davidson & Co., Inc. provides consulting services, litigation
support, and risk analytics for mortgage and asset-backed securities.
The VectorsTM analytics library currently offers prepayment models
for both fixed and adjustable rate mortgages, prepayment models
for asset-backed securities, option-adjusted valuation and risk
management tools for MBS, ABS, CMOs, and interest rate processes.
The company's unique blend of consulting experience and expertise
with cutting-edge quantitative methods allows it to combine decades
of Wall Street experience with the most advanced modeling techniques
to produce informed, effective third-party software.
Contact: Ilda Pozhegu
Andrew Davidson & Co., Inc.
212 274-9075
ilda@ad-co.com
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