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Cash Flow-Wise ABCDS pricing

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  • Penasse, Julien

Abstract

The Asset Backed CDS contract was introduced in 2005 as an extension of the standard corporate CDS. It generally trades under the ISDA "pay-as-you-go'' (PAUG) confirmation which handles the unique features of ABS - amortization, principal writedowns and interest shortfalls. The current market standard for pricing is a simple adaptation of the widely used intensity based model, where the amortization schedule of the security is deterministic. Taking example from some European ABS, we establish stylized facts about their default. In particular, we show that principal writedowns often come along with an extension of the ABS' maturity and can also be preceded by interest shortfalls. This paper introduces adjustments to the classical framework to account for these specificities, with amortization profile becoming a default-dependent function. We show that the resulting duration becomes an increasing function of spread, capturing the fact that distressed ABS shift toward slower amortization.

Suggested Citation

  • Penasse, Julien, 2008. "Cash Flow-Wise ABCDS pricing," MPRA Paper 10853, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:10853
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    References listed on IDEAS

    as
    1. Robert A. Jarrow & Stuart M. Turnbull, 2008. "Pricing Derivatives on Financial Securities Subject to Credit Risk," World Scientific Book Chapters, in: Financial Derivatives Pricing Selected Works of Robert Jarrow, chapter 17, pages 377-409, World Scientific Publishing Co. Pte. Ltd..
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    More about this item

    Keywords

    Asset-Backed Securities (ABS); credit default swap (CDS); ABCDS; pay-as-you-go (PAUG); securitization; valuation;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing

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