[Andrew Davidson & Co] Divide and Conquer - Exploring New OAS Horizons

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1、..ERSPECTIVESPDIVIDEANDCONQUER:EXPLORINGNEWOASHORIZONSUANTITATIVEByALEXLEVINPARTI:ACTIVE-PASSIVEDECOMPOSITION,September2003QPARTII:APREPAYRISK-AND-OPTION-ADJUSTEDVALUATIONCONCEPT,March2004PARTIII:AprOASVALUATIONMODELWITHREFINANCING&TURNOVERRISK,June20

2、04.PartI:Active-PassiveDecompositionpp.1-15PartII:APrepayRisk-and-Option-AdjustedValuationConceptpp.17-33PartIII:AprOASValuationModelwithRefinancing&TurnoverRiskpp.35-51RecommendedFurtherReadingp.52DIVIDE&CONQUER:EXPLORINGNEWOASHORIZONSPARTI:ACTIVE-PA

3、SSIVEDECOMPOSITIONSEPTEMBER2003byAlexLevinQUANTITATIVEPERSPECTIVES..IntroductionIntwopreviouspublications(Levin[2001,2002]),anewmethodofmortgagevaluationmodelingcalledactive-passivedecomposition(APD)wasintroduced.Anefficientalternativetobrute-forceMon

4、te-Carlo,theAPDmethodsplitsamortgagepass-throughintotwopath-independentcomponents,theactive(refinancable)andthepassive(non-refinancable).Oncethisisdone,themosttime-efficientpricingstructuresoperatingbackwardsonprobabilitytreesorfinite-differencegridsc

5、anbeemployed.ThisvaluationmethodrunsfasterthanMonte-Carlowhiledeliveringamuchricheroutcome—allstressedvaluesrequiredbymandatoryriskassessments—atnoadditionalcost.Riskmanagersandtradersofunstructuredmortgageinstruments,suchasagencypass-throughMBS,whole

6、loans,stripped(IO/PO)derivatives,includingmortgageservicingrights(MSRs)maydirectlybenefitfromthemethod.TheAPDapproachsimulatestheburnouteffectinanaturalandexplicitway-throughmodelingtheheterogeneityofthecollateral.Hence,itpresentsananalyticaladvantage

7、overanyotherapproachthatrequiresad-hocjudgmentsabouttheachieveddegreeofburnout.Structuredinstruments,CMOsandABS,thoughtheyretainheavysourcesofpath-dependence(otherthantheburnout)andstillrelyonMonte-Carlopricing,cangainfromabetter,morerobustprepaymodel

8、ing.Themulti-populationviewofmortgagecollateralisaknownapproachtoexplaintheburnouteffect.Inoneoftheearliestmodelingattempts,Davidson[1987]andDavidsonetal[1988]proposedtheRefinancingThresholdmodelinwhichcollateralissplitintothreeormoreAmericano