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Pricing Credit Risk Of Asset-Backed Securitization Bonds In Singapore

Author

Listed:
  • TIEN FOO SING

    (Department of Real Estate, School of Design & Environment, National University of Singapore, 4 Architecture Drive, Singapore 117566, Singapore)

  • SEOW ENG ONG

    (Department of Real Estate, School of Design & Environment, National University of Singapore, 4 Architecture Drive, Singapore 117566, Singapore)

  • GANG-ZHI FAN

    (Department of Real Estate, School of Design & Environment, National University of Singapore, 4 Architecture Drive, Singapore 117566, Singapore)

  • KIAN GUAN LIM

    (School of Business, Singapore Management University, Singapore)

Abstract

Asset-backed securitization (ABS) is a creative arrangement to raise funds through the issuance of marketable securities backed by predictable future cash flows from revenue-producing assets. This paper proposes two pricing models: structural model and intensity model, to value credit spreads on Singapore ABS bonds. Sensitivity analyses were conducted on the ABS credit spreads by varying the values of the key input variables within a plausible range. The property price volatility and its correlations with risk-less interest rates have been shown to have positive effects on the ABS credit spreads. However, when the market volatility is extremely high, the credit spreads decrease with an increase in the time to maturity. The positive effects of the property price volatility were significantly reduced when credit enhancements were added to the ABS bonds, and the credit risks associated with the correlation variable were fully eliminated in the credit enhanced ABS bonds. The rate of loss recovery in the event of default also has significant impact on the credit risks of the ABS bonds. ABS bonds backed by physical property will likely to have high recovery rates thus reducing the credit risks vis-à-vis non-collateralized bonds.

Suggested Citation

  • Tien Foo Sing & Seow Eng Ong & Gang-Zhi Fan & Kian Guan Lim, 2005. "Pricing Credit Risk Of Asset-Backed Securitization Bonds In Singapore," International Journal of Theoretical and Applied Finance (IJTAF), World Scientific Publishing Co. Pte. Ltd., vol. 8(03), pages 321-338.
    • Handle: RePEc:wsi:ijtafx:v:08:y:2005:i:03:n:s0219024905003050
    DOI: 10.1142/S0219024905003050
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    References listed on IDEAS

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    1. Madan, Dilip & Unal, Haluk, 2000. "A Two-Factor Hazard Rate Model for Pricing Risky Debt and the Term Structure of Credit Spreads," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 35(1), pages 43-65, March.
    2. Hugues Pirotte & Didier Cossin, 2000. "Advanced Credit Risk Analysis: Financial Approaches and Mathematical Models to Assess, Price, and Manage Credit Risk," ULB Institutional Repository 2013/191833, ULB -- Universite Libre de Bruxelles.
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    Cited by:

    1. Zhan Liu & Gang-Zhi Fan & Kian Lim, 2009. "Extreme Events and the Copula Pricing of Commercial Mortgage-Backed Securities," The Journal of Real Estate Finance and Economics, Springer, vol. 38(3), pages 327-349, April.

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