ILLUSTRATION OF RISK MEASURES
shows the different risk measures discussed in this chapter for a variety of agency pass-through coupons and CMOs. The exhibit shows the following measures:
• Price and nominal spread (at the Bloomberg medians).
• Option-adjusted spreads (including zero-volatility OAS and option cost).
• Option-adjusted duration and convexity.
• Additional price sensitivity measures (spread, prepayment, and volatility durations).
From this exhibit, a few consistent patterns can be noted. For example, the OADs of MBS are consistently lower than their modified durations. This represents the effects of changing prepayment speeds on MBS prices, also manifested in the negative convexity exhibited by most MBS. The sign of the prepayment duration varies across different bonds, indicating that the effects of faster prepayment speeds on different securities are not consistent. This contrasts with the consistency seen for the volatility durations of the different bonds, indicating that increased levels of volatility are almost always associated with lower prices for MBS.