PRICING CREDIT RISK OF ASSET-BACKED SECURITIZATION BONDS IN SINGAPORE

Tien Foo Sing, Seow Eng Ong (), Gang-Zhi Fan and Kian Guan Lim
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Gang-Zhi Fan: Department of Real Estate, School of Design & Environment, National University of Singapore, 4 Architecture Drive, Singapore 117566, Singapore
Kian Guan Lim: School of Business, Singapore Management University, Singapore

International Journal of Theoretical and Applied Finance (IJTAF), 2005, vol. 08, issue 03, 321-338

Abstract: Asset-backed securitization (ABS) is a creative arrangement to raise funds through the issuance of marketable securities backed by predictable future cash flows from revenue-producing assets. This paper proposes two pricing models: structural model and intensity model, to value credit spreads on Singapore ABS bonds. Sensitivity analyses were conducted on the ABS credit spreads by varying the values of the key input variables within a plausible range. The property price volatility and its correlations with risk-less interest rates have been shown to have positive effects on the ABS credit spreads. However, when the market volatility is extremely high, the credit spreads decrease with an increase in the time to maturity. The positive effects of the property price volatility were significantly reduced when credit enhancements were added to the ABS bonds, and the credit risks associated with the correlation variable were fully eliminated in the credit enhanced ABS bonds. The rate of loss recovery in the event of default also has significant impact on the credit risks of the ABS bonds. ABS bonds backed by physical property will likely to have high recovery rates thus reducing the credit risks vis-à-vis non-collateralized bonds.

Keywords: Asset-backed securitization; credit risk; structural model; intensity model (search for similar items in EconPapers)
Date: 2005
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DOI: 10.1142/S0219024905003050

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