RiskProfiler™

Model Overview
RiskProfiler™ is AD&Co.’s database-driven (MS SQL or Access) valuation solution that incorporates standard and advanced valuation techniques including OAS, prOAS, credit OAS (with the LoanDynamics^TM Model) and derivative pricing. A thouroughly designed front-end exposes market data, valuation options, prepayment tunings and results. Multi-dimensional risk measures can be compiled for large portfolios of MBS, ARMs, CMOs (including credit impaired instruments) and standard rate derivatives to produce portfolio or strategy level summary reports.

Valuation Technique
(A) Backward induction for active-passive decomposed pass-throughs, which is a quick and accurate alternative to Monte-Carlo. The backward inductor provides values on an interest rate grid at no additional time cost.

(B) Forward sampling with various accuracy enhancements. The model allows for using a standard Monte-Carlo, or a more accurate quasi Monte-Carlo with ortho-normalized shocks that ensure exact replication of second moments. An option to "fudge" rates ensures correct discount factors and unbiased long rates even for a limited sample.  Positions can be valued using same or different seeds (rate paths).

Assumptions and Inputs
Market Environment: Trade (valuation) date with available benchmark yield curve (Treasury or Swap rates), a set of ATM swaption volatilities, MBS current-coupon rates, and other necessary market indices.

Interest Rate Model:

·         3 single-factor models (Hull-White, Black-Karasinski, quadratic)

·         Two-factor normal model

Each of the processes is equipped with "instant" calibration engine best approximating ATM swaptions. Alternatively, volatility and mean reversion can be user-defined. The two-factor model requires entering two correlations between the short rate and two user-defined long rates.

Positions’ descriptive data:

·         Valuation Quote: Price, OAS/prOAS or yield; settlement date.

·         For fixed-rate MBS, the indicative data includes Collateral type, Coupon, WAC, WAM, loan age, balloon term, amortization type, cashflow type (this may include IOs, POs and MSRs), and pay frequency.  

·         For ARMs, the indicative data includes that of an MBS plus the full description of reset rules (ARM index, margin, reset frequency and caps, etc.) 

·         For CMOs, the input dataset is minimal and includes cusip (or combination of Deal ID + Bond ID), collateral aggregation level, cleanup call.

·         For standard rate derivatives, the input dataset contains maturity date, schedules for put or call options, coupon steps and amortization (if any).  Embedded options may have European, Bermudan, or American exercise.

Prepayment Model:  The product employs AD&Co’s latest available prepayment model, which may account for enhanced, characteristics such as average loan size, LTV, FICO, geographic information, property type, loan purpose, occupancy that are internally converted into model's tunings.  In most cases, the enhanced dataset is supplied and maintained by users.  Intex’s enhanced data can be automatically loaded (license of Intex’s pool database required).

Risk-Neutral Prepay Model Tunings: To value MBS on a prepay-risk-and-option-adjusted basis (i.e. using prOAS), the system uses risk-neutral prepay tunings. This allows for valuing MBS flat to the respective, same-credit and liquidity, non-MBS benchmark (e.g. agency debentures).

Full Credit Model:  Valuation can be run with delinquencies, defaults and loss severities generated by AD&Co’s LoanDynamics^TM Model (license required).

Third–party CMO/ABS cashflow engines:  Links to Index’s and Chasen’s cashflow subroutines are seamless (vendor’s license required).

Derivatives:  Coverage includes non-MBS fixed-rate bonds, floaters, swaps, swaptions, caps, floors.

Model Outputs
70+ computed fields:

·         Static: Yields, WAL, Equivalent Speed (CPR/PSA)

·         Forward: Yields, WAL, Z-Spread, Equivalent Speed (CPR/PSA)

·         OAS Basics: OAS, OAD, OAC, Option Cost, Vega

·         Key Rate Durations and Convexities

·         Prepay Scale and Tuning “Durations” (Sensitivities)

·         Few key Intex’s data fields

The backward inductor, when employed, provides values for the base market point and interest rate shocks concurrently.

Since all the computational results are deposited into the database, any reports can be written.  AD&Co will provide basic report samples.

Related Research Publications
Divide & Conquer: Exploring New OAS Horizons, Parts I, II & III
Interest Rate Model Selection: Conscientious Choice

System Requirements:
Windows, .NET Framework 2.0, SQL Server or MS Access