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Vintage and Credit Rating What matters in the ABX data during the credit crunch?

Vintage and Credit Rating What matters in the ABX data during the credit crunch?. Mardi Dungey Gerald P. Dwyer Thomas Flavin. Purpose of Paper. Vintage, credit rating and liquidity parts of prices of collateralized debt obligations (CDOs) Using Markit indices of prices

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Vintage and Credit Rating What matters in the ABX data during the credit crunch?

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  1. Vintage and Credit RatingWhat matters in the ABX data during the credit crunch? Mardi Dungey Gerald P. Dwyer Thomas Flavin

  2. Purpose of Paper • Vintage, credit rating and liquidity parts of prices of collateralized debt obligations (CDOs) • Using Markit indices of prices • CDOs based on subprime mortgages • New indices in January 2006, July 2006, January 2007 and June 2007

  3. Correlations of Changes in Log Indices

  4. Factor Model • where vintage i=06-1, 07-1, 07-2 • rating j=AAA, A, BBB • t is time • yi,j,t is the change in the logarithm of the ABX series of vintage i with rating j at time t • fwt is the “world factor” at time t • vi,t is the vintage factor for vintage i at time t • kj,t is the ratings factor for rating j at time t • fi,j,t is the idiosyncratic factor for vintage i with rating j at time t • liqt is a separately estimated factor at time t

  5. “Liquidity” Factor • liqt is an idiosyncratic factor estimated from CDS premia over 3-month Treasury bills • where xi.t is the “excess return” on asset i at time t over 3-month Treasury bills • i includes CDSs, AAA corporate bonds and A corporate bonds • wtis a common factor • fi.t is an idiosyncratic factor

  6. Actual Liquidity Factor • We find that wt is proportional to xA,tessentially, so we can write this

  7. Estimation • Estimate GARCH(1,1) models for the changes in log price series before estimation • Include dummy variables that deal with the non-synchronous starts of series • Estimate by Kalman filter • Data through May 30, 2008

  8. Factor Contributions to 06-1 Indices Common Vintage Rating Liquidity

  9. Factor Contributions to 07-1 Indices Common Vintage Rating Liquidity

  10. Factor Contributions to 07-2 Indices Common Vintage Rating Liquidity

  11. Conclusion • Work in Progress • We think we’ve made some progress in identifying a factor indicating liquidity and counterparty risk • We interpret the estimation as being promising for estimating factors’ importance for CDO prices

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