Q. Does the term structure model selection matter when using the prOAS model? Will it reconcile valuation differences seen under traditional OAS?

A. I mentioned that valuation results provided by two different brokers or analysts would differ less if they employed risk-neutral versions of their respective prepayment models. This is true because a set of undisputed MBS prices become a common denominator in risk-neutral modeling thereby making prepayment models closer.

What I also meant is that all other modeling assumptions are kept identical including the rate model selection. It may sound counter-intuitive and paradoxical at first glance, but the MBS duration differences obtained under the Hull-White model and the Black-Karasinki model will increase rather than decrease with the use of risk-neutral prepay models. We will cover this important topic next time, but the "conscientious" choice of the rate model has apparently become more important than ever.

Q. What is the current instrument coverage by ValueNet?

A. All Fannie and Freddie fixed-rate pass-throughs with other types to follow.