Valuation Commentary

Model Performance

ADCo Update 

  
Valuation Commentary
ARMed with Backward Induction & Risk-Neutrality
By Alex Levin

The new AD&Co prepayment model for ARMs (version 5.2) applies principles and design views proven successful for the fixed-rate MBS. In particular, we have extended the active-passive decomposition (APD) approach, which splits the path-dependent collateral into two path-independent pieces. Valuation via two quick and accurate backward induction steps becomes possible; it replaces the traditional Monte-Carlo altogether. This method greatly facilitates constructing a so-called risk-neutral prepayment model, a process we term “risk-neutral calibration.” Click here to read the full article.

Model Performance
Prepayments Remain in Winter Slump
By Dan Szakallas

As expected, prepayments spanning both fixed-rate and ARM collateral fell across the board from December to January. Fixed rate 30-year collateral fell on balance weighted average of 5.0% for FNMA’s, and by 7.5% for FHLMC’s. The magnitude of the drops was about the same in the 15-yr collateral coupon stack for agencies as well. For GNMA’s, we saw a balance weighted decrease of 7.0% for 15-yr collateral, and almost 9.0% for 30-year collateral. Looking at FHLMC hybrid ARM data, we saw balance weighted drops between 7%-13% in Libor and Treasury indexed 3/1’s 5/1’s and 7/1’s (all during their initial reset period), but interestingly we saw an increase of about 1% for 10/1’s. Click here to read the full article

ADCo Update
HELP! I Need to Validate My Model, Stat!
By Ilda Jacobsen


Don't panic, we have the antidote to your validation emergency. Regulators and auditors spend a substantial amount of time reviewing various models and approaches to valuation and risk management. Since the AD&Co Prepayment Model is part of these reviews, we often receive requests from our clients for documentation and validation procedures on our models. Although AD&Co. meets regularly with the auditing and regulatory community to keep them apprised of our model developments and innovations, client-based reviews of our models are often required. To address these client requests, our Model Validation Resources web page collates the resources available for model validation for the AD&Co Model and breaks down the process into the following steps.

Common user questions we address in this page are:
• How are dlls estimated and validated initially and on an on-going basis?
• How do I verify what version of the ADCo. model I am running?
• Where can model documentation be found?
• How can we confirm that the model is producing satisfactory results?
• How can we confirm that our dll is installed properly into our third party or proprietary asset liability/risk management system?

Please note that clients must have a valid user name and password to enter the Model Validation Resources page. You may contact your account manager Laura or Suzanne to gain access.

 
 
The information contained in The Pipeline is believed to be reliable, but its accuracy and completeness are not guaranteed.  All expressions of opinion are subject to change without notice. The Pipeline is provided for informational purposes only and is not a solicitation, endorsement or a recommendation for purchase or sale of any particular security.  An affiliate of Andrew Davidson & Co., Inc. engages in trading activities in securities that may be the same or similar to those discussed in this publication. Copyright 2007.