ABS, MBS and CDO Compared: An Empirical Analysis

Abstract

The capital market in which asset-backed securities are issued and traded is composed of three main categories: ABS, MBS and CDOs. We were able to examine a total number of 3,466 loans (worth Euro 548.85 billion) of which 1,102 (worth Euro 163.90 billion) have been classified as ABS. MBS issues represent 1,782 issues (worth Euro 320.83 billion), and 582 are CDO issues (worth Euro 64.12 billion). We have investigated how common pricing factors compare for the main classes of securities. Due to the differences in the assets related to these securities, the relevant pricing factors for these securities should differ, too. Taking these three classes as a whole, we have documented that the assets attached as collateral for the securities differ between security classes, but that there are also important univariate differences to consider. We found that most of the common pricing characteristics between ABS, MBS and CDO differ significantly. Furthermore, applying the same pricing estimation model to each security class revealed that most of the common pricing characteristics associated with these classes have a different impact on the primary market spread exhibited by the value of the coefficients. The regression analyses we performed suggest that ABS, MBS and CDOs are in fact different instruments, as implied by the differences in impact of the pricing factors on the loan spread between these security classes.

Keywords: asset securitization, asset-backed securitisation, bank lending, default risk, risk management, spreads, leveraged financing

JEL Classification: G21, G24, G32