An Empirical Analysis of Asset-Backed Securitization

Vink, Dennis (2007): An Empirical Analysis of Asset-Backed Securitization.

Abstract

In this study we provide empirical evidence demonstrating a relationship between the nature of the assets and the primary market spread. The model also provides predictions on how other pricing characteristics affect spread, since little is known about how and why spreads of asset-backed securities are influenced by loan tranche characteristics. We find that default and recovery risk characteristics represent the most important group in explaining loan spread variability. Within this group, the credit rating dummies are the most important variables to determine loan spread at issue. Nonetheless, credit rating is not a sufficient statistic for the determination of spreads. We find that the nature of the assets has a substantial impact on the spread across all samples, indicating that primary market spread with backing assets that cannot easily be replaced is significantly higher relative to issues with assets that can easily be obtained. Of the remaining characteristics, only marketability explains a significant portion of the spreads’ variability. In addition, variations of the specifications were estimated in order to asses the robustness of the conclusions concerning the determinants of loan spreads.

• Item Type: MPRA Paper
• Institution: Nyenrode Business Universiteit
• Language: English
• Keywords: asset securitization; asset-backed securitisation; bank lending; default risk; risk management; leveraged financing
• Subjects: G - Financial Economics > G2 - Financial Institutions and Services > G21 - Banks ; Depository Institutions ; Micro Finance Institutions ; Mortgages; G - Financial Economics > G2 - Financial Institutions and Services > G20 - General

References

Adams, J., 1997, Structuring efficient asset-backed transactions, in: Asset-backed securities, A.K. Bhattacharya and F.J. Fabozzi (eds.) (Frank J. Fabozzi Associates), 207-235.

Administrator of National Banks, 1997, Asset securitization, Comptroller’s Handbook.

Ammer, J. and N. Clinton, 2004, Good news is no news? The impact of credit rating changes on the pricing of asset-backed securities, Working Paper, Board of Governors of the Federal Reserve System.

Ayotte, K.M. and S. Gaon, 2005, Asset-backed securities: costs and benefits of bankruptcy remoteness, Working Paper, Columbia Business School.

Benston, G.J., 1992, The future of asset securitization: the benefits and costs of breaking up the bank, Journal of Applied Corporate Finance 5 (Spring), 71-82.

Benveniste, L.M. and A.N. Berger, 1987, Securitization with recourse an instrument that offers uninsured bank depositors sequential claims, Journal of Banking & Finance 11, 403-424.

Besanko, D. and A. Thakor, 1987, Collateral and rationing: Sorting equilibria in monopolistic and competitive credit markets, International Economic Review 28, 671-689.

Black, F. and J. Cox, 1976, Valuing corporate securities: Some effects of bond indenture provision, The Journal of Finance 31, 857-934.

Blum, L. and C. DiAngelo, 1997, Structuring efficient asset-backed transactions, in: Asset-backed securities, A.K. Bhattacharya and F.J. Fabozzi (eds.) (Frank J. Fabozzi Associates), 237-268.

Blum, L. and E. Mitnick, 1997, Introduction to ABS accounting, in: Asset-backed securities, A.K. Bhattacharya and F.J. Fabozzi (eds.) (Frank J. Fabozzi Associates), 369-382.

Boot, A.W., A.V. Thakor, and G.F. Udell, 1991, Secured lending and default risk: Equilibrium analysis, policy implications, and empirical results, Economic Journal 101, 458-472.

Boot, A.W. and A.V. Thakor, 1993, Security Design, The Journal of Finance 48, 1349-1378.

Boudoukh, J., M. Richardson, R. Stanton, and R.F. Whitelaw, 1998, The pricing and hedging of mortgage-backed securities: A multivariate density estimation approach, Working Paper, Stern School of Business.

Brennan, M. and E. Schwartz, 1978, Corporate income taxes, valuation, and the problem of optimal capital structure, Journal of Business 51, 103-114.

Childs, P.D., S.H. Ott, and T.J. Riddiough, 1996, The pricing of multiclass commercial mortgage-backed securities, Journal of Financial and Quantitative Analysis 31, 581-603.

Chow, G.C., 1960, Tests of equality between sets of coefficients in two linear regressions, Econometrica 28, 591-605.

Choudhry, M. and F.J. Fabozzi, 2003, Originating collateralized debt obligations for balance sheet management, The Journal of Structured and Project Finance 9 (Fall), 32-52.

Choudhry, M. and F.J. Fabozzi, 2004, The Handbook of European Structured Financial Products (Wiley Finance).

Collin, P., R.S. Goldstein, and J.S. Martin, 2001, The determinants of credit spread changes, The Journal of Finance 56, 2177-2207.

Collin, P., R.S. Goldstein, and J. Hugonnier, 2004, A General Formula for Pricing Defaultable Claims, Econometrica 5, 1377-1407.

Cools, K., 1993, Capital structure choice; confirming (meta) theory, empirical tests and executive opinion (Ph.D. dissertation, Tilburg, The Netherlands).

Cummins, J.D., 2004, Securitization of life insurance assets and liabilities, Working Paper, The Wharton School.

Davidson, R. and J.G. MacKinnon, 1993, Estimation and Inference in Econometrics (Oxford University Press), 375-376.

DeMarzo, P.M. and D. Duffie, 1999, A liquidity-based model of security design, Econometrica 67, 65-99.

DeMarzo, P.M., 2005, The pooling and tranching of securities: A model of informed intermediation, Review of Financial Studies 18, 1-35.

Downing, C. and N. Wallace, 2005, Commercial mortgage-backed securities: How much subordination is enough, Working Paper, University of California, Berkeley.

Duffee, G.R., 1998, The relation between treasury yields and corporate bond yield spreads, The Journal of Finance 53, 2225-2241.

Duffee, G.R., 1999, Estimating the price of default risk, Review of Financial Studies (Spring) 12, 197-225.

Duffie, D and K.J. Singleton, 1999, Modeling the term structures of defaultable bonds, Review of Financial Studies 12, 687-720.

Duffie, D. and N. Gârleanu, 2001, Risk and valuation of collateralised debt obligations, Financial Analysts Journal 57, 41-59.

Duffie, D., L.H. Pedersen, and K.J. Singleton, 2003, Modeling sovereign yield spreads: a case study of Russian debt, The Journal of Finance 58, 119-159.

Eakins, S.G. and F.S. Mishkin, 2000, Financial Markets and Institutions (Addison-Wesley).

Elton, E.J., M.J. Gruber, D. Agrawal, and C. Mann, 2001, Explaining the rate spread on corporate bonds, The Journal of Finance 56, 247-277.

Esty, B.C. and W.L. Megginson, 2003, Creditor rights, enforcement, and debt ownership structure: evidence from the global syndicated loan market, Journal of Financial and Quantitative Analysis 38, 37-59.

Fabozzi, F.J. and F. Modigliani, 2002, Capital Markets Institutions and Instruments (Prentice Hall).

Fabozzi, F.J. and W.A. Roever, 2003, A primer on securitization, The Journal of Structured and Project Finance 9 (Summer), 5-19.

Fama, E. and K. French, 1993, Common risk factors in the returns on stocks and bonds, Journal of Financial Economics 33, 3-57.

Financial Accounting Standards Board, 1996, Accounting for transfers and servicing of financial assets and extinguishments of liabilities, Financial Accounting Standard 125.

Firla-Cuchra, M., 2005, Explaining launch spreads on structured bonds, Working Paper, Oxford University.

Firla-Cuchra, M. and T. Jenkinson, 2006, Why are securitization issues tranched?, Working Paper, Oxford University.

Fitch Ratings, Global criteria for collateralised debt obligations, Credit Products Criteria Report (September 13).

Gabbi, G. and A. Sironi, 2005, Which factors affect corporate bonds pricing? Empirical evidence from eurobonds primary market spreads, The European Journal of Finance 11, 59-74.

Gibson, S.D., 2004, The case for the expanded role of trustees in securitizations, Banking Law Journal 121, 387-409.

Gonas, J.S., M.J. Highfield, and D.J. Mullineaux, 2004, When are commercial loans secured?, The Financial Review 1, 79–99.

Gorton, G. and G. Pennacchi, 1990, Financial intermediaries and liquidity creation, The Journal of Finance 45, 49-71.

Gorton, G. and N.S. Souleles, 2005, Special purpose vehicles and securitization, Working Paper, The Wharton School, University of Pennsylvania.

Gottesman, A.A. and G.S. Robert, 2004, Maturity and corporate loan pricing, The Financial Review 39, 55-77.

Greenbaum, S.I. and A.V. Thakor, 1987, Bank funding modes securitization versus deposits, Journal of Banking & Finance 11, 379-401.

Helwege, J. and C.M. Turner, 1999, The slope of the credit yield curve for speculative-grade issuers, The Journal of Finance 54, 1869-1885.

Hess, A.C. and C.W. Smith, 1988, Elements of mortgage securitization, Journal of Real Estate Finance and Economics 1, 331-346.

Hill, C.A., 1997, Securitization: a low cost-sweetener for lemons, Journal of Applied Corporate Finance 10 (Spring), 64-71.

Hill, C.A., 1998, Securitization: a financing strategy for emerging markets firms, Journal of Applied Corporate Finance 11 (Fall), 55-65.

Hsu, L. and C. Mohebbi, 1997, Introduction to ABS accounting, in: Asset-backed securities, A.K. Bhattacharya and F.J. Fabozzi (eds.) (Frank J. Fabozzi Associates), 269-298.

Iacobucci, E.M. and R.A. Winter, 2005, Asset securitization and asymmetric information, Journal of Legal Studies 34, 161-206.

International Financial Services, 2006, Securitisation, City Business Series (March).

James, C., 1988, The use of loan sales and standby letters of credit by commercial banks, Journal of Monetary Economics 22, 395-422.

Jarrow, R.A., D. Lando, and S.M. Turnbull, 1997, A markov model for the term structure of credit risk spreads, Review of Financial Studies 10, 481-523.

Jobst, A., 2002, The pricing puzzle: the default term structure of collateralised loan obligations, Working Paper, London School of Economics and Political Science.

Jobst, A., 2003, Collateralized loan obligations (CLOs): a primer, The Securitization Conduit 6, 1-4.

Jobst, A., 2005a, The regulation treatment of asset securitization: the basle securitization framework explained, Journal of Financial Regulation and Compliance 13, 15-42.

Jobst, A., 2005b, Asset pricing and investor risk in subordinated loan securitization, Working Paper.

John, K., A.W. Lynch, and M. Puri, 2003, Credit ratings, collateral, and loan characteristics: Implications for yield, Journal of Business 76, 371-407.

Kau, J.B., D.C. Keenan, W.J. Muller, and J.F. Epperson, 1987, The valuation and securitization of commercial and multifamily mortgages, Journal of Banking & Finance 11, 525-546.

Kautmos, G., 2002, Modeling the dynamics of MBS spreads, The Journal of Fixed Income 12, 43-51.

Kleimeier, S. and W.L. Megginson, 1998, A comparison of project finance in Asia and the West, in: Project Financing in Asia: A Redefining of Premises, L.H.G. Lang (ed.) (Elsevier - North Holland), 57-90.

Kleimeier, S. and W.L. Megginson, 2001, An empirical analysis of limited recourse project finance, Working Paper, University of Oklahoma, Michel F. Price College of Business.

Kothari, V., 2006, Securitization: The Financial Instrument of The Future (Wiley Finance).

La Porta, R., F. Lopez-de-Silanes, A. Shleifer, R.W. Vishny, 2000, Law and Finance, Working Paper, Harvard University.

Leland, H. and K. Toft, 1996, Optimal capital structure, endogeneous bankruptcy, and the term structure of credit spreads, The Journal of Finance 49, 1213-1252.

Lockwood, L.J., R.C. Rutherford, and M.J. Herrera, 1996, Wealth effects of asset securitization, Journal of Banking & Finance 20, 151-164.

Longstaff, F.A. and E.S. Schwartz, 1995, A simple approach to valuing risky fixed and floating rate debt, The Journal of Finance 50, 789-819.

Lumpkin, S., 1999, Trends and developments in securitization, Financial Market Trends 74, 25-57.

Madan, D. and H. Unal, 1996, Pricing the risk of default, Working Paper, The Wharton School.

Merton, R., 1974, On the pricing of corporate debt: The risk structure of interest rates, The Journal of Finance 29, 449-470.

Minton, B., T. Opler, and S. Stanton, 1997, Asset securitization among industrial firms, Working Paper, Ohio State University.

Modigliani, F. and M.H. Miller, 1958, The cost of capital, corporation finance, and the theory of investment, American Economic Review 48, 261-297.

Moody’s Investors Service, 2001, Non-bankruptcy-remote issuers in asset securitisation, International Structured Finance Special Report (March 22).

Moody’s Investors Service, 2002, European ABS and WBS Market Summary, International Structured Finance Special Report (June 26).

Moody’s Investors Service, 2005, Continued vigour in 2004 backed by structural innovation and strong performance but modest growth expected for 2005, International Structured Finance Special Report (January 25).

Morgan Stanley Capital International, 2006, All country world index, The Morgan Stanley Capital International emerging markets index.

Myers, S.C. and N. Majluf, 1984. Corporate financing and investment decisions when firms have information that investors do not have, Journal of Financial Economics 13, 187-221.

Nederlandsche Bank, 2006, Yearly exchange rates, Statistical Series.

Nomura, 2003, NERA study of structured finance ratings – market implications, Nomura Fixed Income Research (November 6).

Nomura, 2004, CDOs in plain English, Nomura Fixed Income Research (September 13).

Nomura, 2006, MBS basics, Nomura Fixed Income Research (March 31).

Oldfield, G.S., 2000, Making markets for structured mortgage derivatives, Journal of Financial Economics 57, 445-471.

Picone, D., Collateralised debt obligations, 2002, Working Paper, City University Business School, London & Royal Bank of Scotland.

Plantin, G., 2004, Tranching, Working Paper, Tepper School of Business.

Riddiough, T.J., 1997, Optimal design and governance of asset-backed securities, Journal of Financial Intermediation 6, 121-152.

Sarig, O. and A. Warga, 1989, Some empirical estimates of the risk structure of interest rates, The Journal of Finance 44, 1351-1361.

Schwarcz, S.L., 1993, The parts are greater than the whole: How securitization of divisible interests can revolutionize structured finance and open the capital markets to middle-market companies, Columbia Business Law Review 1993, 139-167.

Schwarcz, S.L., 1994, The Alchemy of asset securitization, Stanford Journal of Law, Business & Finance 1, 133-154.

Skarabot, J., 2001, Asset securitization and optimal asset structure of the firm, Working Paper, UC Berkeley, Haas School of Business.

Sopranzetti, B.J., 1999, Selling accounts receivable and the underinvestment problem, The Quarterly Review of Economics and Finance 39, 291-301.

Sorge, M. and B. Gadanecz, 2004, The term structure of credit spreads in project finance, Working Papers, Bank for International Settlements.

Standard & Poor’s, 2006, In the emerging markets, securitization isn’t a commoditized asset, Structured Finance (October 10).

Stanton, R., 1995, Rational prepayment and the valuation of mortgage-backed securities, Review of Financial Studies 8, 677-708.

Stanton, S.W., 1998, The underinvestment problem and patterns in bank lending, Journal of Financial Intermediation 7, 293-326.

Stiglitz, J. and A. Weiss, 1981, Credit rationing on markets with imperfect information, American Economic Review 71, 393-410.

Stone, C.A. and A. Zissu, 2000, Securitization: the transformation of illiquid financial assets into liquid capital market securities, Financial Markets, Institutions & Instruments 9, 133-277.

Stone, C.A. and A. Zissu, 2004, Fund of fund securitizations, Journal of Derivatives 11 (Summer 2004), 62-68.

Structured Finance International, Securitizations of non-US assets - January 1, 1999 to March 31, 2005, SFI Data (Euromoney Institutional Investor).

The Bond Market Association (2002), SEC Hearing on Credit Rating Agencies, Statement of The Bond Market Association (November 21).

Telpner, J., 2003, A securitization primer for first time issuers, Global Securitisation and Structured Finance, Greenberg Taurig.

Thomas, H., 1999, A preliminary look at gains from asset securitization, Journal of International Financial Markets, Institutions and Money 9, 321-333.

Thomas, H., 2001, Effects of asset securitization on seller claimants, Journal of Financial Intermediation 10, 306-330.

White, H., 1980, A heteroscedasiticity-consistent covariance matrix estimator and a direct test for heteroscedasticity, Econometrica 48, 817-838.

Winton, A., 1995, Costly state verification and multiple investors: The role of seniority, Review of Financial Studies 8 (Spring), 91-123.

Wolfe, S., 2000, Structural effects of asset-backed securitization, The European Journal of Finance 6, 353-369.