OAS and default risk concept, valuation, corporate, only, default

transferpricing

R29 Relative-Value Methodologies for Global Credit Bond Portfolio Management
P.76 Spread analysis

"Given the exclusion of default risk in OAS option-valuation models,
OAS valuation has seen only limited extention into the higher-risk markets of the
quasi-equity, high-yield corporate, and EMG-debt asset classes."

what does this sentence mean?

OAS doesn't reflect default risk??

Please explain this concept...

bkballa

Also, the OAS adjusted option pricing model also does not include the volatility of credit spread.

Colum

OAS adjusts for optionality (Call or Put option) but does not adjust for default risk. As it does not adjust for default risk, it is difficult to use in the high yield markets where default risk may drive the overall spread or is more dominant than the impact of a call or price option on the price.