The Concept of Credit OAS in Valuation of MBS
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Date: 11-10-2008
Start Time:
6:00pm
End Time: 7:30pm
Speaker: Alex Levin, Andrew Davidson & Co.
Location: 412 Schapiro CEPSR, Davis Auditorium
ABSTRACT
The Credit OAS method is underpinned by a coupled simulations of both interest rates and home prices, and the MBS cashflows are explicitly generated with losses. Therefore, we attempt to quantify the role of both prepayment option and default option and come up with a more rigorous valuation framework that the traditional OAS method offers. From the option-theoretic angle, default is a put option on property, but the construct of credit-protection layers in structured MBS resembles digital options.
The presentation will spell out the necessary ingredients of Credit OAS including various aspects of financial engineering, but will focus on its 2 most important themes: stochastisity and risk-neutrality. In particular, we will show where the risk-neutral conditions of home prices can come from and how the credit risk and liquidity risk premia can be separated.
The talk is based on a joint work with Andrew Davidson and a recent paper published by The Journal of Portfolio Management.
BIO
Alex Levin leads Andrew Davidson & Co., Inc.'s efforts in developing new efficient valuation models for mortgages, derivatives and other financial instruments and related consulting work. He has developed a suite of interest rate models that can be instantly calibrated to swap rates and a swaption volatility matrix. He proposed and developed the Active-Passive Decomposition (APD) mortgage model facilitated by a backward induction OAS pricing. In a joint effort with Andrew Davidson, Alex developed a new concept of prepay risk-and-option-adjusted valuation. This approach introduced a new valuation measure, prOAS, and a notion of risk-neutral prepay modeling that explained many phenomena of the MBS markets. Alex’s current work focuses on the valuation of instruments exposed to credit risk (“Credit OAS”).
Until March of 2002, Alex was a Senior Vice President and Director of Treasury Research and Analytics at The Dime Bancorp (the Dime) in New York. At the Dime, he authored Mortgage Solutions, Deposit Solutions and Option Solutions, the Dime's proprietary pricing systems that were intensively used for both security trading and risk assessment. In addition, he was regularly involved in measuring market risk (including a counter-party value-based risk) and hedging positions in various lines of the banking business.
Prior to his employ at the Dime, Alex taught at The City College of NY and worked at Ryan Labs, a fixed income research and money management company.
Alex is a regular speaker at the Mathematical Finance Seminar (NYU, Courant Institute), AD&Co client conferences, and has published a number of papers. He holds an M.S. in Applied Mathematics from Naval Engineering Institute, Leningrad and a Ph.D. in Control and Dynamic Systems from Leningrad State University.