Valuation Commentary

AD&Co OAS v6.0: Valuation Analytics That Make a Difference
by Alex Levin

Valuation systems used to price MBS are often referred to as “OAS systems” or even “Monte-Carlo systems.” This common jargon would hardly reflect the depth and rigor of the AD&Co OAS version 6.0 that combines a traditional Monte-Carlo-based approach with an ultra-speedy backward induction alternative – the first choice for pass-throughs. Regardless of the instrument type, the same analytics can be employed for running both OAS and prOAS; the latter is a novel measure we introduced last year to capture the prepay model risk. Clients who have already licensed our previous OAS models (5.2 or earlier) will have no obstacles in integrating and using v6.0. This short article summarizes key points that will be presented in detail during our upcoming double-header Client Conference (in New York on June 2 and in San Francisco on June 7).

Innovative Valuation Approach: OAS without Monte-Carlo

OAS valuation does not always mean Monte-Carlo. The active-passive decomposition (APD) model splits path-dependent collateral into path-independent (but different) pieces – “active” and “passive;” hence, valuation via backward induction becomes feasible for unstructured MBS. In order to fully realize the power of this method, I have compiled some facts in the table below.

 

 

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