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AD&Co. Update
Valuation is in Vogue
by Rob Landauer
Like fashion, the “right” way to value MBS and ABS is a matter of taste. While some prefer the look of the moment, others are more comfortable with the classic style. The same is true for the valuation dilemma—should you stick with the classic style or adopt the new approaches? Some of the questions to be decided are:
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Should I use a lognormal or normal distribution of rates in my term structure model?
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Should I use a one or two factor term structure model?
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Should my prepayment model be fitted to actual speeds or be based on a risk neutral approach?
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How many paths should I use when running OAS?
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What factors should my prepayment model take into consideration?
At AD&Co, we say, "let the client decide." Our new valuation release, v6.0, contains a host of enhancements that will enable even the most finicky investor and conservative risk manager to implement their notion of the right way to value MBS and ABS. These enhancements are now available through our OAS Spreadsheet through Excel or as a subroutines or shared object. For more information, please contact Rob or Ilda.
