ValueNet

Model Overview
a valuation system that utilizes a cohesive set of new techniques and models, including Active-Passive Decomposition (APD), Prepayment risk-and-option-adjusted spread (prOAS) and The Enhanced MBS Prepayment Model to more fully capture the risk profile of MBS than traditional analytical approaches.

Valuation Technique
(A) Backward induction for active-passive decomposed pass-throughs, which is a quick and efficient alternative to Monte-Carlo. The backward inductor provides values on default interest rate grid at no additional time cost.
(B) Forward sampling with accuracy enhancements. The model allows for using antithetically reflected Monte-Carlo, or a more accurate quasi Monte-Carlo with ortho-normalized shocks. An option to "fudge" rates ensures correct discount factors even for a limited sample.

Model Inputs:
Interest Rate Process: Trade (valuation) date with available benchmark yield curve (Treasury or Swap rates) and a set of ATM swaption volatilities. The model is equipped with "instant" calibration engine. 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. Volatility and mean reversion speed (calibration engine using implied volatility from the swaptions market is available); trade and settlement date; benchmark yield curve (Treasury or Swap rates)

OAS Analytics: Price, yield or OAS/prOAS:, settlement date. MBS indicatives include collateral type, Coupon, WAC, WAM, loan age, balloon term, amortization type, cashflow type (this may include IOs, POs and MSRs), and pay frequency.

Prepayment Model: The Model may account for enhanced, user-supplied, characteristics such as average loan size, LTV, FICO, geographic information, etc. that are internally converted into model's tunings.

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

Enhanced Prepayment Model: Current Coupon forecast; collateral type; WAC; WAM; loan age

Model Outputs
Price or OAS/prOAS; pay-up versus matching TBA; effective duration and convexity, option cost; prepayment durations; static and forward curve results including WALs and WAL-equivalent speeds. The backward inductor provides values for the base market point and default interest rate shocks concurrently.
OAS; effective duration and convexity; key rate duration; prepayment durations; total return; scenario analyses; static and forward curve results.

Model Documentation
Divide & Conquer: Exploring New OAS Horizons, Parts I, II & III

Platforms Supported
Subroutines: Windows
Shared Objects: can be generated for Solaris, HP and Linux
Excel
Web

Click Here for More Details