Non-U.S. Asset-Backed Securities: Spread Determinants and Over-Reliance on Credit Ratings
Nyenrode Business University
Frank J. Fabozzi
EDHEC Business School
June 30, 2009
Yale ICF Working Paper No. 09-13
In this paper, we empirically investigate two economic issues (1) the factors that affect the primary market spread on non-U.S. asset-backed securities and (2) whether investors rely solely on credit ratings and ignore other credit-related factors. We do so by using a panel-data fixed-effects model of primary market spreads for tranches of non-mortgage-related asset-backed securities issued over the period 1999-2006. With respect to the determinants of the primary market spread, we find that spread can be explained in terms of two factors credit rating and bond market conditions. Our tests support the hypothesis that despite heavy reliance on credit ratings, investors do consider factors that the rating agencies state that they consider in assigning ratings. Hence, there is reason to suspect that the notion of pure reliance on assigned ratings that has been popularized in the market may be overstated.
Number of Pages in PDF File: 36
Keywords: asset-backed securities (ABS), credit ratings, collateral, default risk, securitization, securitisation
JEL Classification: G21, G24, G32
Date posted: July 12, 2009 ; Last revised: October 4, 2012
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