Valuation Commentary

prOAS Delivered, Explained and Discussed
by Alex Levin

The May issue of The Pipeline wrapped up the introduction of valuation with prepay risk-and-option-adjusted spread (prOAS). Since then two major things happened. First, AD&Co hosted it's 12th Client Conference. The first half of the day was dedicated to these new modeling approaches. Second, a new AD&Co Quantitative Perspectives, "Divide and Conquer: Exploring New OAS Horizons", has been published and was made available to conference attendees. Those who missed the conference can download the paper from the Research Report section of our website. This report is a 52-page trilogy covering topics ranging from the Active-Passive decomposition (APD) mortgage model to practical valuation and calibration exercises using prOAS. In short, it is about what AD&Co believes is an approach that provides a more consistent and realistic assessment of the relative value of MBS. These analytics can be demonstrated through our web-based platform, ValueNet.

The main themes of the trilogy were presented in several conference talks and were met with genuine interest by the audience. During and after the sessions, questions raised by the audience led to discussions about the practical applications of the new analytical paradigm. I thought that the essence of those conversations might be interesting for all our readers so I decided to compile them and share.

Q. How many clients have already been using ValueNet and the prOAS valuation method?

A. A number of firms requested free trial for ValueNet, which, being a WEB demo, requires no installation hassles.

We started consulting several large clients on using customized risk-neutral tunings for AD&Co prepayment model v.4.3.3, which is widely employed. Since March 19, we have been publishing these recommendations on our WEB site assuming clients use the Hull-White term structure model through our OAS system or through a third-party vendor.

We also can and do derive values for clients' portfolios of fairly illiquid instruments using the prOAS method. >>>