Penasse, Julien (2008): Cash Flow-Wise ABCDS pricing.
Download (329Kb) | Preview
The Asset Backed CDS contract was introduced in 2005 as an extension of the standard corporate CDS. It generally trades under the ISDA "pay-as-you-go'' (PAUG) confirmation which handles the unique features of ABS - amortization, principal writedowns and interest shortfalls. The current market standard for pricing is a simple adaptation of the widely used intensity based model, where the amortization schedule of the security is deterministic.
Taking example from some European ABS, we establish stylized facts about their default. In particular, we show that principal writedowns often come along with an extension of the ABS' maturity and can also be preceded by interest shortfalls. This paper introduces adjustments to the classical framework to account for these specificities, with amortization profile becoming a default-dependent function. We show that the resulting duration becomes an increasing function of spread, capturing the fact that distressed ABS shift toward slower amortization.
|Item Type:||MPRA Paper|
|Original Title:||Cash Flow-Wise ABCDS pricing|
|Keywords:||Asset-Backed Securities (ABS), credit default swap (CDS), ABCDS, pay-as-you-go (PAUG), securitization, valuation|
|Subjects:||G - Financial Economics > G1 - General Financial Markets > G12 - Asset Pricing; Trading volume; Bond Interest Rates
G - Financial Economics > G1 - General Financial Markets > G13 - Contingent Pricing; Futures Pricing
|Date Deposited:||01. Oct 2008 04:55|
|Last Modified:||12. Feb 2013 22:24|
Brunel, V., Jribi F. “Model-independent ABS duration approximation formulas”
Crouhy M., Jarrow R., Tunrbull S., “The Subprime Credit Crisis of 2007”, Working Paper, April 2008
Fermanian J.-D., “A top-down approach for MBS, ABS and CDO of ABS: a consistent way to manage prepayment, default and interest rate risks”, Working paper, July 2008.
Jarrow, R., Turnbull, S., “Pricing Derivatives on Financial Securities Subject to Credit Risk”, Journal of Finance, American Finance Association, vol. 50(1), pages 53-85, March 1995.
Lando, D., “On Cox Processes and Credit Risky Securities”, Derivatives Research, Vol. 2, No. 2-3, pp. 99-120, December 1998.
Hull J., White A., “Valuing Credit Default Swaps I: No Counterparty Default Risk”, The Journal of Derivatives, Vol. 8, No. 1, pp. 29-40, Fall 2000
Richard F., Roll R., “Prepayment on Fixed-Rate Mortgage-Backed Securities”, The Journal of Portfolio Management, Vol. 15, pp. 73-82, Spring 1989
Schwartz E., Torous W., “Prepayment and the valuation of Mortgage-Backed-Securities”, The Journal of Finance, Vol. 44, No. 2, pp. 375-392, June 1989