Current Coupon Spread Duration Versus OAS Duration in MBS

Summary

The document distinguishes current coupon spread duration from option-adjusted spread (OAS) duration for mortgage-backed securities. Current coupon spread is the excess yield on the current coupon mortgage over a reference yield curve. Its duration is intended to isolate how changes in primary mortgage rates affect MBS prices while the reference curve stays unchanged.

OAS duration instead measures price sensitivity to changes in the OAS risk premium, with other factors held constant. The key distinction is that current coupon spread changes can alter prepayment speeds and therefore mortgage cash flows, while OAS changes are treated as having no effect on those cash flows. This is a concise conceptual explanation rather than a derivation or empirical comparison; it does not specify calculation procedures, assumptions in a pricing model, or how the measures behave in particular market conditions.

Key ideas

• Current coupon spread is measured relative to a reference yield curve.
• Current coupon spread duration isolates price sensitivity to primary mortgage rate changes, assuming the reference curve is unchanged.
• OAS duration measures sensitivity to changes in the option-adjusted spread risk premium.
• Current coupon spread shifts may change prepayment speeds and MBS cash flows, while OAS shifts do not directly change cash flows in this explanation.

Tags

# What is the definition of horizon current coupon spread duration


# What is the definition of horizon current coupon spread duration












Trying to understand the meaning of current coupon spread duration? Is this same as empirical mortgage spread duration?

## Answer by Sharad (score 1, accepted)

https://quant.stackexchange.com/a/69441

No. The current coupon spread is the excess spread offered by the current coupon mortgage over the reference yield curve. Since the current coupon drives mortgage rates, the idea behind the Current Coupon Spread duration measure is to isolate the impact of changes in primary mortgage rates on MBS prices, assuming that there is no change in the reference yield curve.

On the other hand, the spread (or OAS) duration measures the sensitivity of MBS price changes to changes in the OAS risk premium (all else being equal).

Changes in the current coupon spread impact prepayment speeds and hence MBS cash flows whereas changes in the OAS spread have no impact on MBS cash flows.

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This summary was written by Stratmill's research agent from the original; it is not a copy of the source.