page 289 exibit 1 States that if the bench mark is the issuers own securities and you have a positive OAS, the security is underpriced… back on page 287, we are told that OAS with issuer spot curve reflects liquidy risk… THUS, can we realy conclude that a positive OAS meens underpriced… that positive OAS could be reflecting liquidy differences…?
don’t have the book in front of me but I think you’re missing something. The point is you want a high OAS and low option cost. You have to compare to the benchmark…so if the BM has the same credit & liquidity risk, then you want the higher OAS
"so if the BM has the same credit & liquidity risk then you want the higher OAS " if the BM has came credit and liquidy risk, you should be fine with an OAS of 0, that would meen fairly priced … my problem with what they are doing is that they assume a positive OAS meens underpriced while they neglect the fact that even if the BM is the issuers own curve, if the security under examination has lower liquidity it may have a high required OAS and thus simply having a positive OAS is not enough
good point, find me an example
dont have an example, but if you look in the CFA book where they first talking about OAS they clearly tell you that when the bench mark is the issuer, OAS can reflect liquidy risk… a few pages later they ignore than and tell you , positive OAS meens undervalued when the benchmark is the issuer… 