Explaining Launch Spreads on Structured Bonds

25 Pages Posted: 18 Mar 2005

See all articles by Maciej Firla Cuchra

Maciej Firla Cuchra

University of Oxford - Department of Economics; Said Business School, University of Oxford; Oxford Economic Research Associates (OXERA) Consulting Ltd.

Date Written: November 2004

Abstract

We investigate determinants of launch spreads in European securitization transactions over the last decade. First, we develop a simple, reduced-form pricing model for all issues across different transaction types and test it. We document the critical importance of credit ratings without refinements as the key pricing factors for structured finance securities at launch. Next, we show that other price determinants, such as placement characteristics, are consistently significant in their impact on spreads and delineate the opposing effects of liquidity and market segmentation. Finally, we show that other factors that might directly affect investors' payoffs, such as creditors' rights, exhibit consistent relationships to launch spreads beyond the credit rating. Hence, we conjecture that credit rating agencies systematically differ from investors in their assessment of certain issues' and markets' characteristics.

Keywords: securitizations, structured finance, spreads, bond markets, liquidity, segmentation

JEL Classification: G14, G15, G32

Suggested Citation

Firla-Cuchra, Maciej T., Explaining Launch Spreads on Structured Bonds (November 2004). Available at SSRN: https://ssrn.com/abstract=687800 or http://dx.doi.org/10.2139/ssrn.687800

Maciej T. Firla-Cuchra (Contact Author)

University of Oxford - Department of Economics ( email )

Manor Road Building
Manor Road
Oxford, OX1 3BJ
United Kingdom

Said Business School, University of Oxford

Park End Street
Oxford, OX1 1HP
Great Britain

Oxford Economic Research Associates (OXERA) Consulting Ltd.

Alfred Street
Oxford OX1 4EH
United Kingdom

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