In the theme of this release we examine how Fixed Income Performance Attribution (FIPA) can be used to value the use of a First Prepay Model. We have looked at the concept of FIPA in an earlier release but since we are now very close at releasing a version of RIO which contains a FIPA functionality we thought it would be interesting to revise the subject.
We start by giving a general introduction to the concept of FIPA after which we look at our specific set-up. After giving a description of the First Prepay Model, we begin our analysis.
We consider two models that differ only in that one of them uses the First Prepay Model while the other does not. The FIPA set-up is constructed in a way that allows us to follow the return stemming from a specific change in the prepayment estimate. By using this property we find that the use of the First Prepay Model allows us to identify biased prepayment estimates much earlier.