Sizing and Performance of Fixed-Rate Residential Mortgage Asset-Backed Securities Tranches

Che-Chun Lin, Jow-Ran Chang (), Ting-Heng Chu () and Larry J. Prather ()
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Jow-Ran Chang: Department of Quantitative Finance, National Tsing Hua University, 100, Sec. 2, Kuang-Fu Rd, Hsinchu, Taiwan
Ting-Heng Chu: Department of Economics and Finance, East Tennessee State University, PO Box 70267, Johnson City, TN 37614, USA
Larry J. Prather: John Massey School of Business, Southeastern Oklahoma State University, USA

Review of Pacific Basin Financial Markets and Policies (RPBFMP), 2013, vol. 16, issue 04, 1-16

Abstract: The objective of this paper is to offer a methodology for sizing credit-sensitive Asset Backed Securities (ABS) used in the prime mortgage lending sector in the U.S. and then to evaluate their relative performance. Using a multi-factor Monte Carlo simulation framework, we perform a four-step analysis. First, we estimate scenario-specific credit losses from a given mortgage pool. We then structure the pool into a "6-pack" subordination structure based on statistically-determined stress economic scenarios. Next, we estimate performance indicators of the tranches to compare risk-adjusted returns. Finally, we report our results in terms of tranche-specific risk-adjusted returns. The results indicate that the middle tranches of ABS, e.g., BBB and BB, possess the lowest risk-adjusted returns. We also find and explain a "cliff" phenomenon in the tranche-level principal cash flows.

Keywords: Default; credit loss; subordination; CDO; F31; F37; F47 (search for similar items in EconPapers)
JEL-codes: G1 G2 G3 (search for similar items in EconPapers)
Date: 2013
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Citations: View citations in EconPapers (2)

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DOI: 10.1142/S0219091513500240

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