ANDREW DAVIDSON & CO., INC. ENHANCES ITS LIBRARY OF TERM STRUCTURE MODELS
New York City, October 8, 2002—Andrew Davidson & Co., Inc. is pleased to announce that their VectorsTM suite of analytical tools has been expanded to include two new term structure models specifically designed for the analysis of mortgage and asset backed securities. Now, in addition to the recently enhanced Black Karasinski model, the library also includes both a squared Gaussian and a Hull White Model. These models have been fully integrated into the firm’s OAS subroutines.
A detailed examination of the implications of a prolonged period of relatively low interest rates and implied volatility skew for swaptions on the valuation of mortgage-backed securities led the company to expand its selection of term structure models. Because different interest rate environments warrant varied term structure models, Andrew Davidson & Co., Inc. has responded by offering a choice. Each of the available models is based on a different distribution of interest rates over time; BK assumes lognormality; HW assumes normality and SG assumes normal process squared (chi-squared distribution). Depending upon the prevailing level and volatility of interest rates, risk managers, traders and portfolio managers may now choose the most appropriate model for the given interest rate environment.
All of the models, implemented on a lattice, now operate with time-dependent volatility as well as with a constant one. They may be fit to the observed volatility term structure for swaptions rather accurately and quickly through the use of the calibration tools included with the models.
Senior Consultant Alex Levin, who developed the enhanced term structure library, remarks, “We expect that investors will appreciate our strong and convenient volatility calibration tools. Along with the standard absence of arbitrage, our model will assess value of the embedded prepay option most accurately.” Levin has written an issue of Quantitative Perspectives, the company’s publication, detailing the research that justifies a proper selection of the Interest Rate Model. The article, entitled “Interest Rate Modeling: A Conscientious Choice,” is now available on the Andrew Davidson & Co., Inc. website at www.ad-co.com.
Andrew Davidson, the company’s president and founder states, “Alex Levin’s work serves to keep our models at the forefront of mortgage research and analysis. In the current rate environment, Hull-White (normal distribution) and squared Gaussian models provide a better fit to observed volatility patterns. We hope that analysts and investors will evaluate these models and determine for themselves the benefit of using the alternative volatility formulations for valuation and risk management.”
Andrew Davidson & Co., Inc. provides consulting services, litigation support, and risk analytics for mortgage and asset-backed securities. The VectorsTM analytics library currently offers prepayment models for both fixed and adjustable rate mortgages, prepayment models for asset-backed securities, option-adjusted valuation and risk management tools for MBS, ABS, CMOs, and interest rate processes. The company’s unique blend of consulting experience and expertise with cutting-edge quantitative methods allows it to combine decades of Wall Street experience with the most advanced modeling techniques to produce informed, effective third-party software.
