A Top-Down Approach for Asset-Backed Securities: A Consistent Way of Managing Prepayment, Default and Interest Rate Risks

A Top-Down Approach for Asset-Backed Securities: A Consistent Way of Managing Prepayment, Default... We define a new approach to manage prepayment, default and interest rate risks simultaneously in some standard asset-backed securities structures. We propose a parsimonious top-down approach, by modeling directly the portfolio loss process and the amortization process. Both are correlated to interest rates. The methodology is specified for sequential- and pro-rata pay bonds (ABS, CMO, CDO of ABS), cash or synthetic. We prove analytical formulas to price all tranches, under and without the simplifying assumption that amortization occurs in the most senior tranche only. The model behavior is illustrated through the empirical analysis of an actual synthetic ABS trade. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png The Journal of Real Estate Finance and Economics Springer Journals

A Top-Down Approach for Asset-Backed Securities: A Consistent Way of Managing Prepayment, Default and Interest Rate Risks

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Publisher
Springer US
Copyright
Copyright © 2011 by Springer Science+Business Media, LLC
Subject
Economics / Management Science; Regional/Spatial Science; Finance/Investment/Banking
ISSN
0895-5638
eISSN
1573-045X
D.O.I.
10.1007/s11146-011-9331-2
Publisher site
See Article on Publisher Site

Abstract

We define a new approach to manage prepayment, default and interest rate risks simultaneously in some standard asset-backed securities structures. We propose a parsimonious top-down approach, by modeling directly the portfolio loss process and the amortization process. Both are correlated to interest rates. The methodology is specified for sequential- and pro-rata pay bonds (ABS, CMO, CDO of ABS), cash or synthetic. We prove analytical formulas to price all tranches, under and without the simplifying assumption that amortization occurs in the most senior tranche only. The model behavior is illustrated through the empirical analysis of an actual synthetic ABS trade.

Journal

The Journal of Real Estate Finance and EconomicsSpringer Journals

Published: Jul 6, 2011

References

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