Price of Risk Constant (PORC)

The main idea behind PORC is to adjust the holding period returns and horizon prices of mortgage securities to reflect changing risk levels as interest rates change. OAS models assume constant risk in all interest rate scenarios; PORC allows prepayment risks to change but holds the price of risk constant. The authors illustrate for a regular pass-through security how the PORC-predicted OAS is higher (lower) than constant OAS in down (up) rate scenarios and how constant OAS overestimates (underestimates) rates of return in down (up) rate environments.