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A Top-Down Approach for Asset-Backed Securities: A Consistent Way of Managing Prepayment, Default and Interest Rate Risks

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  • Jean-David Fermanian

Abstract

We define a new approach to manage prepayment, default and interest rate risks simultaneously in some standard asset-backed securities structures. We propose a parsimonious top-down approach, by modeling directly the portfolio loss process and the amortization process. Both are correlated to interest rates. The methodology is specified for sequential- and pro-rata pay bonds (ABS, CMO, CDO of ABS), cash or synthetic. We prove analytical formulas to price all tranches, under and without the simplifying assumption that amortization occurs in the most senior tranche only. The model behavior is illustrated through the empirical analysis of an actual synthetic ABS trade. Copyright Springer Science+Business Media, LLC 2013

Suggested Citation

  • Jean-David Fermanian, 2013. "A Top-Down Approach for Asset-Backed Securities: A Consistent Way of Managing Prepayment, Default and Interest Rate Risks," The Journal of Real Estate Finance and Economics, Springer, vol. 46(3), pages 480-515, April.
    • Handle: RePEc:kap:jrefec:v:46:y:2013:i:3:p:480-515
    DOI: 10.1007/s11146-011-9331-2
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    References listed on IDEAS

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    Cited by:

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    2. Qiming Zhang & Linda Yin-nor Tjia & Biyue Wang & Aksel Ersoy, 2021. "Sustainable Construction and Financing—Asset-Backed Securitization of Expressway’s Usufruct with Redeemable Rights," Sustainability, MDPI, vol. 13(16), pages 1-17, August.

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