May
15
awarded  Popular Question
2017
Aug
6
awarded  Student
Jul
7
comment Interpretation of OAS on MBS
For the case of a callable bond I think that replication is long a bond stripped of the option and short a call option on the stripped bond. As explained in Pedersen "Explaining the Lehman Brothers Option Adjusted Spread of a Corporate Bond" this doesn't fully hedge when you are short the callable and long the replication because your short call option could be exercised and the bond issuer choose not to call the bond. I guess the "factor your model does not take into account" is the issuer's cost of issuing a new bond. Isn't this primarily the issuer's credit spread ~= OAS?
Jul
6
asked Interpretation of OAS on MBS
Jul
5
awarded  Informed