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Combination notes: market segmentation and equity transfer

  • Schaber, Albert
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    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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    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
    Date of revision:
    Handle: RePEc:lmu:msmdpa:4151
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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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    5. John Y. Campbell & Glen B. Taksler, 2002. "Equity Volatility and Corporate Bond Yields," NBER Working Papers 8961, National Bureau of Economic Research, Inc.
    6. 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.
    7. Gary Gorton & Nicholas S. Souleles, 2005. "Special purpose vehicles and securitization," Working Papers 05-21, Federal Reserve Bank of Philadelphia.
    8. Peter M. DeMarzo, 2005. "The Pooling and Tranching of Securities: A Model of Informed Intermediation," Review of Financial Studies, Society for Financial Studies, vol. 18(1), pages 1-35.
    9. 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.
    10. Jeffery D. Amato & Eli M Remolona, 2005. "The pricing of unexpected credit losses," BIS Working Papers 190, Bank for International Settlements.
    11. 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.
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