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Combination notes: market segmentation and equity transfer

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  • Schaber, Albert
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    Abstract

    This paper empirically analyzes a particular type of notes observed in securitization transactions: combination notes. Combination notes are formed by combining parts of two or more tranches of securitization transactions, where one part usually consists of a share of the first loss piece. It is analyzed whether combination notes are purely demand driven, or whether combination notes also appear to be structured to enable equity transfer. Results indicate that combination notes serve both purposes: market segmentation severely determines the structuring of combination notes, but risk transfer needs seem to be catered by combination notes as well. Further, an analysis of launch spreads indicates, that the observed equity transfer via combination notes has an impact on the pricing of the ordinary tranches of each deal. This paper makes use of unique data on 126 deals containing 1385 tranches, thereof 398 combination notes.

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    Bibliographic Info

    Paper provided by University of Munich, Munich School of Management in its series Discussion Papers in Business Administration with number 4151.

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    Date of creation: 30 May 2008
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    Handle: RePEc:lmu:msmdpa:4151

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    Keywords: combination note; first loss piece; securitization; collateralized debt obligation; security design;

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    1. Longstaff, Francis A & Schwartz, Eduardo S, 1995. " A Simple Approach to Valuing Risky Fixed and Floating Rate Debt," Journal of Finance, American Finance Association, vol. 50(3), pages 789-819, July.
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    4. Gary Gorton & George Pennacchi, 1990. "Banks and Loan Sales: Marketing Non-Marketable Assets," NBER Working Papers 3551, National Bureau of Economic Research, Inc.
    5. Jeffery D. Amato & Eli M Remolona, 2005. "The pricing of unexpected credit losses," BIS Working Papers 190, Bank for International Settlements.
    6. John Y. Campbell & Glen B. Taksler, 2002. "Equity Volatility and Corporate Bond Yields," Harvard Institute of Economic Research Working Papers 1945, Harvard - Institute of Economic Research.
    7. Gary Gorton & Nicholas Souleles, 2005. "Special Purpose Vehicles and Securitization," NBER Working Papers 11190, National Bureau of Economic Research, Inc.
    8. Riddiough, Timothy J., 1997. "Optimal Design and Governance of Asset-Backed Securities," Journal of Financial Intermediation, Elsevier, vol. 6(2), pages 121-152, April.
    9. Günter Franke & Thomas Weber, 2006. "Wie werden Collateralized Debt Obligation-Transaktionen gestaltet?," CoFE Discussion Paper 06-08, Center of Finance and Econometrics, University of Konstanz.
    10. Joost Driessen, 2005. "Is Default Event Risk Priced in Corporate Bonds?," Review of Financial Studies, Society for Financial Studies, vol. 18(1), pages 165-195.
    11. Maciej Firla-Cuchra & Tim Jenkinson, 2005. "Security Design in the Real World: Why are Securitization Issues Tranched?," Economics Series Working Papers 225, University of Oxford, Department of Economics.
    12. Gregory R. Duffee, 1998. "The Relation Between Treasury Yields and Corporate Bond Yield Spreads," Journal of Finance, American Finance Association, vol. 53(6), pages 2225-2241, December.
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    Cited by:
    1. Gann, Philipp, 2009. "Liquidität, Risikoeinstellung des Kapitalmarktes und Konjunkturerwartung als Preisdeterminanten von Collateralized Debt Obligations (CDOs) - Eine simulationsgestützte Analyse," Discussion Papers in Business Administration 10582, University of Munich, Munich School of Management.

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