Quarterly Update of the SPV Service - Third Quarter 2005

The theme of this release deals with the calculation of Vega on MBSs. Vega measures the price sensitivity to a change in the volatility. Since the volatility is not directly specified in the pricing model, we are not able to simply calculate the partial derivative as is known from standard equity pricing models.
Instead, the quotes of the assets used in the calibration of the term structure are shifted. This method is justified by analyzing historical changes using Principal Component Analysis.
The calculated values of Vega are show to have nice properties and intuitive interpretations for both standard callable MBSs and capped floaters and float-to-fixed bonds.