Release of RIO 4.3.4 - Mean reverting loan spread

A new version of RIO and RIO Function Library has been released. The new version 4.3.4 primarily introduces an extension of the pricing model, where the loan spread can to decrease towards a long term level, instead of remaining constant.

The extension is motivated by the high prepayment rates estimated on the 7% coupon bonds by models not using a loan yield spread, while no prepayment is observed in the market. The mismatch is primarily due to the recent large increase in the loan yield spread, which some models do not directly incorporate. On the other hand using the spread directlty, the models reduces the prepayments greatly on all future terms.

The mean reverting loan spread extension has the desirable effect of bringing the models on track for the 7% coupons bonds without compromising the segment of lower coupon bonds.