Suppose one wants to compute an OAS on a portfolio of securities, but one can only compute the OAS of the individual securities. Is there a "best" way (under some metric) for one to go about doing this? One could simply take a weighted average by balance, duration, dollar duration, or something else.

I get the feeling that no matter what averaging technique is used, some information would be lost and there would be some inevitable model risk involved. Ideally one could run a Monte Carlo simulation on the entire portfolio at once to compute the portfolio OAS - this would be the "correct" OAS.

In sum, I suppose I have the following question(s):

  1. Is there any industry standard or "best" way to combine OASs?
  2. Is there any research out there in attempting to quantify the model risk involved in doing such a thing?

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