Hello,
The literature on this topic is very confusing. It seems easy enough, but many times the text seems to say two contractory things or has a graph that does exactly the opposite that the text says should be happening.
For instance, Veronesi says that the price of the PAC tranche does not change as PSA changes (as long as it is within the initially prescribed range) but then the graph p 316, shows the value of the PAC increasing as interest rates decrease (when PSA would be increasing). Likewise, he says that the value of the companion tranche decreases as PSA increases (p 314) but the same graph shows the value of the companion tranche increasing as rates decrease (when PSA should be increasing).
I am sorry for the complicated question, but it seems like there is something inconsistent going on. Am I looking intot his too much?
Thanks!
Shannon
The literature on this topic is very confusing. It seems easy enough, but many times the text seems to say two contractory things or has a graph that does exactly the opposite that the text says should be happening.
For instance, Veronesi says that the price of the PAC tranche does not change as PSA changes (as long as it is within the initially prescribed range) but then the graph p 316, shows the value of the PAC increasing as interest rates decrease (when PSA would be increasing). Likewise, he says that the value of the companion tranche decreases as PSA increases (p 314) but the same graph shows the value of the companion tranche increasing as rates decrease (when PSA should be increasing).
I am sorry for the complicated question, but it seems like there is something inconsistent going on. Am I looking intot his too much?
Thanks!
Shannon
