Correlation, price discovery and co-movement of ABS and equity

Asset-backed securitization (ABS) has become a viable and increasingly attractive risk management and refinancing method either as a standalone form of structured finance or as securitized debt in Collateralized Debt Obligations (CDO). However, the absence of industry standardization has prevented rising investment demand from translating into market liquidity comparable to traditional fixed income instruments, in all but a few selected market segments. Particularly low financial transparency and complex security designs inhibits profound analysis of secondary market pricing and how it relates to established forms of external finance. This paper represents the first attempt to measure the intertemporal, bivariate causal relationship between matched price series of equity and ABS issued by the same entity. In a two-dimensional linear system of simultaneous equations we investigate the short-term dynamics and long-term consistency of daily secondary market data from the U.K. Sterling ABS/MBS market and exchange traded shares between 1998 and 2004 with and without the presence of cointegration. Our causality framework delivers compelling empirical support for a strong co-movement between matched price series of ABS-equity pairs, where ABS markets seem to contribute more to price discovery over the long run. Controlling for cointegration, risk-free interest and average market risk of corporate debt hardly alters our results. However, once we qualify the magnitude and direction of price discovery on various security characteristics, such as the ABS asset class, we find that ABS-equity pairs with large-scale CMBS/RMBS and credit card/student loan ABS reveal stronger lead-lag relationships and joint price dynamics than whole business ABS. JEL Classifications: G10, G12, G2

Collateralised loan obligations (CLOs) : a primer

The following descriptive paper surveys the various types of loan securitisation and provides a working definition of so-called collateralised loan obligations (CLOs). Free of the common rhetoric and slogans, which sometimes substitute for understanding of the complex nature of structured finance, this paper describes the theoretical foundations of this specialised form of loan securitisation. Not only the distinctive properties of CLOs, but also the information economics inherent in the transfer of credit risk will be considered, so that we can equally privilege the critical aspects of security design in the structuring of CLO transactions

Enterprise information security policy assessment - an extended framework for metrics development utilising the goal-question-metric approach

Effective enterprise information security policy management requires review and assessment activities to ensure information security policies are aligned with business goals and objectives. As security policy management involves the elements of policy development process and the security policy as output, the context for security policy assessment requires goal-based metrics for these two elements. However, the current security management assessment methods only provide checklist types of assessment that are predefined by industry best practices and do not allow for developing specific goal-based metrics. Utilizing theories drawn from literature, this paper proposes the Enterprise Information Security Policy Assessment approach that expands on the Goal-Question-Metric (GQM) approach. The proposed assessment approach is then applied in a case scenario example to illustrate a practical application. It is shown that the proposed framework addresses the requirement for developing assessment metrics and allows for the concurrent undertaking of process-based and product-based assessment. Recommendations for further research activities include the conduct of empirical research to validate the propositions and the practical application of the proposed assessment approach in case studies to provide opportunities to introduce further enhancements to the approach

Corporate Bond Market in India: Current Scope and Future Challenges

The capital market of an economy is considered to be well developed, only when a parallel development is ensured both in the equity and the debt segment. There is no doubt that the equity market in India is quite well developed and plays a crucial role in the growth of Indian economy. At the same time, Govt. debt market in India has also experienced a tremendous growth in the last decade. But unlike Govt. bonds, the corporate debt segment in India is still in the nascent stage and requires lot of initiatives to bring it to the Global standard. Bonds of different tenors issued by Central or State Governments and other PSUs capture more than 80 percent of the total debt market volume in India. Therefore, it has become very important to have a well run and liquid corporate bond market that can play a critical role in supporting economic development in India, both at the macroeconomic and microeconomic levels. Massive future growth in infrastructure, as required to achieve the higher GDP growth, can only be ensured through availability of long-term financing and also at a reasonable cost. Due to several issues, applicable to several market players, bank financing is not the right choice to meet all the financing needs to facilitate such growth. A well developed corporate bond market can be the optimal alternative, not only to support the financing requirement for infrastructural development, but also to relieve banks from all the problems of long-term financing, and spreading out the huge financing risk to a wider investor base to strengthen India’s bank-based financial system, to allow corporate borrowers to tap the low cost market, to enable investors including FIIs to earn fixed but higher returns, and above all to ensure overall growth of the economy. The present study analyze the existing structure of Indian corporate bond market, vis-à-vis the other developed markets, and attempted to explain the movements and changes taken place in Indian debt market during the last decade, may be as a result of several regulatory initiatives. The importance of an well developed corporate bond market for various groups of Indian financial sector, followed by the important factor contributing to the inferior growth of such market, supported by several facts and figures, are discussed in the study. It has been finally observed that, even if some changes have taken place to strengthen Indian corporate debt market, the market has a significant scope to contribute to the overall growth of Indian economy, but obviously subject to some very important and stringent initiatives from the Government and the concerned regulatory bodies

The pricing puzzle : the default term structure of collateralised loan obligations

Ambivalence in the regulatory definition of capital adequacy for credit risk has recently stirred the financial services industry to collateral loan obligations (CLOs) as an important balance sheet management tool. CLOs represent a specialised form of Asset-Backed Securitisation (ABS), with investors acquiring a structured claim on the interest proceeds generated from a portfolio of bank loans in the form of tranches with different seniority. By way of modelling Merton-type risk-neutral asset returns of contingent claims on a multi-asset portfolio of corporate loans in a CLO transaction, we analyse the optimal design of loan securitisation from the perspective of credit risk in potential collateral default. We propose a pricing model that draws on a careful simulation of expected loan loss based on parametric bootstrapping through extreme value theory (EVT). The analysis illustrates the dichotomous effect of loss cascading, as the most junior tranche of CLO transactions exhibits a distinctly different default tolerance compared to the remaining tranches. By solving the puzzling question of properly pricing the risk premium for expected credit loss, we explain the rationale of first loss retention as credit risk cover on the basis of our simulation results for pricing purposes under the impact of asymmetric information. Klassifikation: C15, C22, D82, F34, G13, G18, G2

“Financial alchemy” or a zero sum game? Real estate finance, securitisation and the UK property market

Following the US model, the UK has seen considerable innovation in the funding, finance and procurement of real estate in the last decade. In the growing CMBS market asset backed securitisations have included $2.25billion secured on the Broadgate office development and issues secured on Canary Wharf and the Trafford Centre regional mall. Major occupiers (retailer Sainsbury’s, retail bank Abbey National) have engaged in innovative sale & leaseback and outsourcing schemes. Strong claims are made concerning the benefits of such schemes – e.g. British Land were reported to have reduced their weighted cost of debt by 150bp as a result of the Broadgate issue. The paper reports preliminary findings from a project funded by the Corporation of London and the RICS Research Foundation examining a number of innovative schemes to identify, within a formal finance framework, sources of added value and hidden costs. The analysis indicates that many of the gains claimed conceal costs – in terms of market value of debt or flexibility of management – while others result from unusual firm or market conditions (for example utilising the UK long lease and the unusual shape of the yield curve). Nonetheless, there are real gains resulting from the innovations, reflecting arbitrage and institutional constraints in the direct (private) real estate marke

Cash Flow-Wise ABCDS pricing

The Asset Backed CDS contract was introduced in 2005 as an extension of the standard corporate CDS. It generally trades under the ISDA "pay-as-you-go'' (PAUG) confirmation which handles the unique features of ABS - amortization, principal writedowns and interest shortfalls. The current market standard for pricing is a simple adaptation of the widely used intensity based model, where the amortization schedule of the security is deterministic. Taking example from some European ABS, we establish stylized facts about their default. In particular, we show that principal writedowns often come along with an extension of the ABS' maturity and can also be preceded by interest shortfalls. This paper introduces adjustments to the classical framework to account for these specificities, with amortization profile becoming a default-dependent function. We show that the resulting duration becomes an increasing function of spread, capturing the fact that distressed ABS shift toward slower amortization.Asset-Backed Securities (ABS), credit default swap (CDS), ABCDS, pay-as-you-go (PAUG), securitization, valuation

The transactions costs of primary market issuance : the case of Brazil, Chile, and Mexico

The author documents the precise costs of debt and equity issuance, both domestically and internationally, for firms in Brazil, Chile, and Mexico. Costs include investment banking and legal fees, regulatory and exchange listing costs, rating agency fees, and expenditures for marketing and publishing. Her findings suggest that Brazilian firms face similar costs in issuing debt locally or abroad, whereas domestic equity issuance is nearly twice as expensive as debt. While the Chilean domestic corporate debt market is well developed by emerging market standards (size of the market and maturity of issues), Chilean firms can issue debt more cheaply internationally than at home. In addition, while equity financing is cheaper in Chile from a transaction cost perspective, over the past decade most firms have used bonds rather than shares to raise capital. This financing trend is true in all three countries. Finally, Mexican firms can issue debt at the lowest costs of the three, but face the highest equity issuing costs. In addition to documenting these features, the author sheds light on how the investor base in these countries plays a strong role in influencing the ability of firms to access domestic capital markets.Financial Intermediation,International Terrorism&Counterterrorism,Economic Theory&Research,Payment Systems&Infrastructure,Banks&Banking Reform,Economic Theory&Research,Financial Intermediation,Banks&Banking Reform,Environmental Economics&Policies,Housing Finance

How can SMEs benefit from big data? Challenges and a path forward

Big data is big news, and large companies in all sectors are making significant advances in their customer relations, product selection and development and consequent profitability through using this valuable commodity. Small and medium enterprises (SMEs) have proved themselves to be slow adopters of the new technology of big data analytics and are in danger of being left behind. In Europe, SMEs are a vital part of the economy, and the challenges they encounter need to be addressed as a matter of urgency. This paper identifies barriers to SME uptake of big data analytics and recognises their complex challenge to all stakeholders, including national and international policy makers, IT, business management and data science communities. The paper proposes a big data maturity model for SMEs as a first step towards an SME roadmap to data analytics. It considers the ‘state-of-the-art’ of IT with respect to usability and usefulness for SMEs and discusses how SMEs can overcome the barriers preventing them from adopting existing solutions. The paper then considers management perspectives and the role of maturity models in enhancing and structuring the adoption of data analytics in an organisation. The history of total quality management is reviewed to inform the core aspects of implanting a new paradigm. The paper concludes with recommendations to help SMEs develop their big data capability and enable them to continue as the engines of European industrial and business success. Copyright © 2016 John Wiley & Sons, Ltd.Peer ReviewedPostprint (author's final draft

How do Financial Institutions in China Mitigate Risks in Securitization Markets?

Asset securitization as the essential financial tool has increased the liquidity of underlying assets and promoted rapid economic development. In 2008, the outbreak of Subprime Mortgage Crisis that brought by the collapse of securitization triggered the U.S. securitization market to realize the risks involved in structured financial products, and thus facilitated the development of risk controlling tools. Through the analysis of securitization process, drivers, and credit rating agencies, the study concentrates on the formation of risks and modeling evaluation with evidence in both China and the U.S. markets. Statistical analysis was conducted on Chinese securitized products combining with risk management models built in the U.S. market. The results not only show risk evaluation tools that could improve the market maturity but also reveals the lack of information disclosure in China with the limited access to historical data. The paper attempts to address policy recommendations on mitigating potential risks and promoting financial developments in the China securitization market