Cash Flow-Wise ABCDS pricing
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.
|Date of creation:||17 Sep 2008|
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- 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..
- Jarrow, Robert A & Turnbull, Stuart M, 1995. " Pricing Derivatives on Financial Securities Subject to Credit Risk," Journal of Finance, American Finance Association, vol. 50(1), pages 53-85, March.
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