Why is it that higher volatility for a callable bond leads to a smaller OAS compared to the same callable bond with a lower volatility? per page 302 Book 5 CFAI
You can think of the OAS as being the Z-spread less the amount of the spread attributed to the option. Ex: z-spread = 140, OAS = 50. Option cost = (140-50) 90. If the volatility of the bond increases, then the value of the call increases. This means that the option cost will increase. Assuming the z-spread stays stable, the OAS will have to decrease.
thanks for that explanation.