SPV October 2008 - Mean Reverting Loan Yield Spreads
The theme of this release introduces an extension of the pricing model, in which the current loan spread reverts to a long term level.
The extension is motivated by the high prepayment rates estimated by the DMBS model of the 7% coupon bonds, while no prepayment have been observed in the market. The mismatch is primarily due to the recent large increase in the loan spread, which the DMBS model does not directly incorporate.
The mean reverting loan spread extension has the desirable effect of bringing the models on track for the 7% coupons bonds with almost no change to the segment of lower coupon bonds.
The theme discusses the calculation of loan spreads and describes the extension of the pricing model.
The theme additionally includes calculations on a sample of benchmark bonds and a detailed analysis of the key figure properties of the 7% coupon bonds in four different model setups.