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Valuation Methods
RiskProfiler™ implements all AD&Co’s rigor in understanding how MBS are priced in the marketplace.
Static Analysis: While our prepayment models and LDM can forecast prepayment, default and losses of loans, they can’t compute the resultant cashflows of complex financial instruments on their own. RiskProfiler™ can.
Traditional OAS Method: Option-adjusted valuation using AD&Co’s empirical prepayment model. For MBS and ARM pass-throughs, we can rely on the blazing speed of backward induction – thanks to the fine property of our active-passive decomposition (APD) modeling structure. For CMOs, an efficient Monte-Carlo, or even more accurate, quasi Monte-Carlo will be employed.
The AD&Co prOAS Method: An OAS method operating with a risk-neutral prepayment model instead of an empirical one. This method accounts for the prepay model risk priced by the market. It levels the playing field for instruments like TBA, IOs, POs and CMOs. The prOAS method is proven to be a more accurate predictor of price change than the traditional OAS.
The AD&Co Credit OAS Method: An OAS method operating in the space of two random risk factors, interest rates and home prices, and allows losses to be modeled explicitly. Rather than using a traditional OAS method with an artificially inflated discount spread (OAS), we rely on the LDM to directly forecast default rates and loss severities, along each path. Thus generated cashflows are discounted using a suitable liquidity spread (crOAS).
Each of these methods is available within one system, RiskProfiler™, and engaged by simple user selections.
