Explaining Launch Spreads on Structured Bonds
AbstractWe investigate determinants of launch spreads in European securitization transactions over the last decade. First, we develop a simple, reduced-form pricing model for all issues across different transaction types and test it. We document the critical importance of credit ratings without refinements as the key pricing factors for structured finance securities at launch. Next, we show that other price determinants, such as placement characteristics, are consistently significant in their impact on spreads and delineate the opposing effects of liquidity and market segmentation. Finally, we show that other factors that might directly affect investors` payoffs, such as creditors` rights, exhibit consistent relationships to launch spreads beyond the credit rating. Hence, we conjecture that credit rating agencies systematically differ from investors in their assessment of certain issues` and markets` characteristics.
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Bibliographic InfoPaper provided by University of Oxford, Department of Economics in its series Economics Series Working Papers with number 230.
Date of creation: 01 Mar 2005
Date of revision:
Securitisations; Credit Ratings; Structured Finance; Bond Markets; Asset Pricing; Liquidity;
Find related papers by JEL classification:
- G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
- G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
- G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
This paper has been announced in the following NEP Reports:
- NEP-ALL-2006-03-18 (All new papers)
- NEP-FIN-2006-03-18 (Finance)
- NEP-FMK-2006-03-18 (Financial Markets)
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