OAS and volatility of interest rates.

[sachin_patel]

Elan’s notes say “The higher the interest rate volatility assumed, the lower the OAS for a callable bond.”
Isn’t OAS unaffected by Volatility? To my understanding, the higher the interest rate volatility, the higher the option cost and effectively the higher the z-spread, but OAS shouldn’t be affected by this.
Thanks in advance.

 

[ro424]

OAS = Z-Spread - Option Cost, so since the option cost goes up with vol, OAS goes down
The Z-Spread is unchanged (zero-volatility)

 

[sachin_patel]

Got it.. thanks! I was thinking opposit