TY - JOUR T1 - European Securitization JF - The Journal of Structured Finance SP - 55 LP - 80 DO - 10.3905/jsf.2006.628545 VL - 12 IS - 1 AU - Andreas A. Jobst Y1 - 2006/04/30 UR - https://pm-research.com/content/12/1/55.abstract N2 - Asset-backed securitization is a highly flexible yet complex refinancing technique that involves the issuance of contingent claims with varying seniority on the cash flow performance of a designated pool of asset exposures. Efficient risk management of ABS obligations requires both investors and issuers to thoroughly understand the inherent spread dynamics in this growing segment of fixed income markets. We model the heteroskedasticity of weekly secondary market spreads of European CDO, MBS, and Pfandbrief transactions in a multi-factor GARCH process for valuation and forecasting purposes. We find that expected spread changes follow a positive trend with asymmetric mean reversion depending on the direction of past spread changes. A statistically and economically stronger contribution by negative first moments of past spreads on mean spread changes indicates stronger difference stationarity when spreads are tightning. However, we observe a random stochastic process if spreads widen over several consecutive period. Also most of the conditional spread volatility is informed by negative past innovations, which constitute most of the economic significance of a positive general GARCH effect. These spread dynamics over our sample period imply that a higher risk premium from a sudden contraction of spreads seems to induce higher spread volatility at times when widening spread levels testify to negative investor sentiment.TOPICS: Asset-backed securities, credit risk management, statistical methods ER -