Non-U.S. Asset-Backed Securities: Spread Determinants and Over-Reliance on Credit Ratings

36 Pages Posted: 12 Jul 2009 Last revised: 4 Oct 2012

Dennis Vink

Nyenrode Business University

Frank J. Fabozzi

EDHEC Business School

Date Written: June 30, 2009

Abstract

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.

Keywords: asset-backed securities (ABS), credit ratings, collateral, default risk, securitization, securitisation

JEL Classification: G21, G24, G32

Suggested Citation

Vink, Dennis and Fabozzi, Frank J., Non-U.S. Asset-Backed Securities: Spread Determinants and Over-Reliance on Credit Ratings (June 30, 2009). Yale ICF Working Paper No. 09-13. Available at SSRN: https://ssrn.com/abstract=1431994

Dennis Vink (Contact Author)

Nyenrode Business University ( email )

Straatweg 25
P.O. Box 130
Breukelen, 3620 AC
Netherlands

HOME PAGE: http://www.dennisvink.nl

Frank J. Fabozzi

EDHEC Business School ( email )

France
215 598-8924 (Phone)

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