Looking Beyond Credit Ratings: Factors Investors Consider In Pricing European Asset†Backed Securities

Frank Fabozzi () and Dennis Vink

European Financial Management, 2012, vol. 18, issue 4, 515-542

Abstract: In this paper, we empirically investigate what credit factors investors rely upon when pricing the spread at issue for European asset†backed securities. More specifically, we investigate how credit factors affect new issuance spreads after taking into account credit rating. We do so by investigating primary market spreads for tranches of non†mortgage†related asset†backed securities issued from 1999 to the year prior to the subprime mortgage crisis, 2007. We find that although credit ratings play a major role in determining spreads, investors appear to not rely exclusively on these ratings. Our findings strongly suggest that investors do not ignore other credit factors beyond the assigned credit rating.

Date: 2012
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