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

Author

Listed:
  • Che-Chun Lin

    (Department of Quantitative Finance, National Tsing Hua University, 100, Sec. 2, Kuang-Fu Rd, Hsinchu, Taiwan)

  • 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)

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.

Suggested Citation

  • Che-Chun Lin & Jow-Ran Chang & Ting-Heng Chu & Larry J. Prather, 2013. "Sizing and Performance of Fixed-Rate Residential Mortgage Asset-Backed Securities Tranches," Review of Pacific Basin Financial Markets and Policies (RPBFMP), World Scientific Publishing Co. Pte. Ltd., vol. 16(04), pages 1-16.
    • Handle: RePEc:wsi:rpbfmp:v:16:y:2013:i:04:n:s0219091513500240
    DOI: 10.1142/S0219091513500240
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    References listed on IDEAS

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    1. Gary Gorton, 2008. "The panic of 2007," Proceedings - Economic Policy Symposium - Jackson Hole, Federal Reserve Bank of Kansas City, pages 131-262.
    2. Gary Gorton, 2008. "The panic of 2007," Proceedings - Economic Policy Symposium - Jackson Hole, Federal Reserve Bank of Kansas City, pages 131-262.
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    Cited by:

    1. Solomon Y. Deku & Alper Kara & Nodirbek Karimov, 2021. "Do investors value frequent issuers in securitization?," Review of Quantitative Finance and Accounting, Springer, vol. 57(4), pages 1247-1282, November.
    2. Solomon Y. Deku & Alper Kara & Artur Semeyutin, 2021. "The predictive strength of MBS yield spreads during asset bubbles," Review of Quantitative Finance and Accounting, Springer, vol. 56(1), pages 111-142, January.

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    More about this item

    Keywords

    Default; credit loss; subordination; CDO; F31; F37; F47;
    All these keywords.

    JEL classification:

    • G1 - Financial Economics - - General Financial Markets
    • G2 - Financial Economics - - Financial Institutions and Services
    • G3 - Financial Economics - - Corporate Finance and Governance

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