
	February 28, 2006 Welcome to The Pipeline, Andrew Davidson & Co., Inc.'s monthly newsletter. Created as a "pipeline" of relevant and useful information for participants in the fixed income industry, we address recent trends, changes and advances that our consultants, developers and sales force have extensively studied. We value your input and urge you to contact us with questions, comments or article suggestions. Enjoy!



	AD&Co. Update Model Performance Review Valuation Commentary

AD&Co. Update

New Non-Agency Fixed Rate Model Now Available (v5.1d)

By Rob Landauer

We are pleased to announce the availability of our new fixed rate non-agency 15 and 30 year prepayment model. The new model is integrated into the latest version of our library, v5.1d, which is now available from AD&Co. upon request. This new model is based upon jumbo prime data (non-conforming due to size) and replaces the existing pool and loan level whole loan models that were used in v5.1c and earlier versions of the AD&Co. MBS Prepayment Model. Read more...

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Model Performance Review

Model Performance
By Dan Szakallas

Prepayment speeds decreased from December to January. The drop was the largest of the previous few months and was also a sharper decline than many in the MBS industry anticipated. However, the Andrew Davidson & Co., Inc. prepayment model forecasts were extremely close to the January speeds, coming in around 1-2 CPR below the actual speeds. FNMA 30-year pools showed large drops across the 4.5 to 8.0 coupon spectrum, with most coupons falling by more than 20% from December. Read more...

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Valuation Commentary

Volatility Models and Mean Reversion

By Alex Levin

During the end of January, I received several calls from clients questioning the calibration of the mean reversion parameter for the Black-Karasinski model. They were alarmed because the mean reversion fell to zero and asked for a verification of this outcome. I explained that the zero is our lower bound (floor) when calibrating the mean reversion; therefore, the odds of seeing this bound reached are not small. Why did the mean reversion become zero and continue to remain at zero? The answer is related to the dynamics of the yield curve, volatility curve and to the model selection itself. In this piece, I will cover these inter-related topics. Read more...

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