Sizing and Performance of Fixed-Rate Residential Mortgage Asset-Backed Securities Tranches
Document Type
Article
Publication Date
12-1-2013
Description
The objective of this paper is to offer a methodology for sizing credit-sensitive Asset Backed Securities (ABS) used in the prime mortgage lending sector in the U.S. and then to evaluate their relative performance. Using a multi-factor Monte Carlo simulation framework, we perform a four-step analysis. First, we estimate scenario-specific credit losses from a given mortgage pool. We then structure the pool into a 6-pack subordination structure based on statistically-determined stress economic scenarios. Next, we estimate performance indicators of the tranches to compare risk-adjusted returns. Finally, we report our results in terms of tranche-specific risk-adjusted returns. The results indicate that the middle tranches of ABS, e.g., BBB and BB, possess the lowest risk-adjusted returns. We also find and explain a cliff phenomenon in the tranche-level principal cash flows.
Citation Information
Lin, Che Chun; Chang, Jow Ran; Chu, Ting Heng; and Prather, Larry J.. 2013. Sizing and Performance of Fixed-Rate Residential Mortgage Asset-Backed Securities Tranches. Review of Pacific Basin Financial Markets and Policies. Vol.16(4). https://doi.org/10.1142/S0219091513500240 ISSN: 0219-0915
