An OAS Framework for Portfolio Attribution Analysis

Bill Burns, Ph.D. and Wensong Chu, Ph.D.

The authors present an option adjusted spread (OAS) based approach for fixed income portfolio performance attribution analysis. The authors demonstrate how total return can be decomposed into several specific scenario returns according to the underlying pricing models for each fixed income security. A sequential evolution of variables from the beginning of the period to the end of the period defines these specific scenarios. The authors also introduce the concept of “peer groups'” to define returns attributable to the sector/quality of a bond, and a new powerful pricing tool based on the sector/quality return of a peer group. Finally, the authors show the promising theoretical and practical advantages of the OAS based methodology over traditional duration based methods.