Vintage and Credit Rating What matters in the ABX data during the credit crunch? Mardi Dungey Gerald...
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Transcript of Vintage and Credit Rating What matters in the ABX data during the credit crunch? Mardi Dungey Gerald...
Vintage and Credit RatingWhat 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– CDOs based on subprime mortgages– New indices in January 2006, July 2006,
January 2007 and June 2007
1/1/2006 1/1/2007 1/1/2008 1/1/2009Date
0
20
40
60
80
100
06-1 vintage
Abx Prices by Vintage
1/1/2006 1/1/2007 1/1/2008 1/1/2009Date
0
20
40
60
80
100
06-2 vintage
1/1/2006 1/1/2007 1/1/2008 1/1/2009Date
0
20
40
60
80
100
AAAAAABBBBBBm
07-1 vintage
1/1/2006 1/1/2007 1/1/2008 1/1/2009Date
0
20
40
60
80
100
07-2 vintage
1/1/2006 1/1/2007 1/1/2008 1/1/2009Date
020406080
100
AA
A
06-1 Vintage06-2 Vintage07-1 Vintage07-2 Vintage
AAA
1/1/2006 1/1/2007 1/1/2008 1/1/2009Date
020406080
100
AA
Abx Prices by Rating
AA
1/1/2006 1/1/2007 1/1/2008 1/1/2009Date
020406080
100
A
A
1/1/2006 1/1/2007 1/1/2008 1/1/2009Date
020406080
100
BB
B
BBB
1/1/2006 1/1/2007 1/1/2008 1/1/2009Date
020406080
100
BB
Bm
BBB-
Correlations of Changes in Log Indices
AAA06-1 A06-1 BBB06-1 AAA07-2 A07-2 BBB07-2
AAA06-1 1 0.745 0.556 0.777 0.429 0.336
A06-1 0.745 1 0.715 0.679 0.587 0.456BBB06-1 0.556 0.715 1 0.485 0.606 0.493
AAA07-2 0.777 0.679 0.485 1 0.505 0.355
A07-2 0.429 0.587 0.606 0.505 1 0.485
BBB07-2 0.336 0.456 0.493 0.355 0.485 1
1/1/2007
-0.2
-0.1
0.0
0.1
Cha
nge
in lo
garit
hm
Your text
AAA 06-1
1/1/2007
-0.2
-0.1
0.0
0.1
ABX indices 2006Changes in logarithms through December 5, 2008
A 06-1
1/1/2007
-0.2
-0.1
0.0
0.1 BBB 06-1
1/1/2007
-0.2
-0.1
0.0
0.1
Cha
nge
in lo
garit
hm
AAA 06-1
1/1/2007
-0.2
-0.1
0.0
0.1 A 06-2
1/1/2007
-0.2
-0.1
0.0
0.1 BBB 06-2
1/1/2007
-0.2
-0.1
0.0
0.1
Cha
nge
in lo
garit
hm
AAA 07-1
1/1/2007
-0.2
-0.1
0.0
0.1A 07-1
ABX Indices 2007Changes in logarithms through December 5, 2008
1/1/2007
-0.2
-0.1
0.0
0.1BBB 07-1
1/1/2007Date
-0.2
-0.1
0.0
0.1
Cha
nge
in lo
garit
hm
AAA 07-2
1/1/2007
-0.2
-0.1
0.0
0.1A 07-2
1/1/2007
-0.2
-0.1
0.0
0.1BBB 07-2
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
“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
– wt is a common factor
– fi.t is an idiosyncratic factor
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
AAA: vintage 1w orld factor
-3-2.5
-2-1.5
-1-0.5
00.5
11.5
1 101 201 301 401 501
AAA: vintage 1vintage factor
-6
-4
-2
0
2
4
6
1 101 201 301 401 501
AAA: vintage 1ratings factor
-4
-2
0
2
4
6
1 101 201 301 401 501
AAA: vintage 1liquidity factor
-4
-3
-2
-1
0
1
2
3
4
1 101 201 301 401 501
A: vintage 1w orld factor
-2
-1.5
-1
-0.5
0
0.5
1
1 101 201 301 401 501
BBB: vintage 1w orld factor
-3
-2
-1
0
1
2
1 101 201 301 401 501
A: vintage 1vintage factor
-3
-2
-1
0
1
2
1 101 201 301 401 501
BBB: vintage 1vintage factor
-6
-4
-2
0
2
4
6
1 101 201 301 401 501
A: vintage 1ratings factor
-1-0.8-0.6-0.4-0.2
00.20.40.60.8
1 101 201 301 401 501
BBB: vintage 1ratings factor
-1-0.8-0.6-0.4-0.2
00.20.40.60.8
1 101 201 301 401 501
A: vintage 1liquidity factor
0
2
4
6
8
10
12
14
16
1 101 201 301 401 501
BBB: vintage 1liquidity factor
0
0.5
1
1.5
2
2.5
3
1 101 201 301 401 501
Factor Contributions to 06-1 Indices
Common
Vintage
Rating
Liquidity
Factor Contributions to 07-1 IndicesAAA: vintage 2
w orld factor
-6-5-4-3-2-10123
1 101 201 301 401 501
AAA: vintage 2vintage factor
-2.5-2
-1.5-1
-0.50
0.51
1.52
2.5
1 101 201 301 401 501
A: vintage 2vintage factor
-1.5
-1
-0.5
0
0.5
1
1 101 201 301 401 501
AAA: vintage 2ratings factor
-1.00E-09-5.00E-100.00E+005.00E-101.00E-091.50E-092.00E-092.50E-093.00E-093.50E-09
1 101 201 301 401 501
A: vintage 2ratings factor
-0.15
-0.1
-0.05
0
0.05
0.1
0.15
1 101 201 301 401 501
BBB: vintage 2ratings factor
-5-4-3-2-101234
1 101 201 301 401 501
AAA: vintage 2liquidity factor
0
0.1
0.2
0.3
0.4
0.5
1 101 201 301 401 501
A: vintage 2liquidity factor
0
0.2
0.4
0.6
0.8
1
1.2
1.4
1.6
1 101 201 301 401 501
BBB: vintage 2liquidity factor
0
1
2
3
4
5
6
1 101 201 301 401 501
A: vintage 2w orld factor
-4
-3
-2
-1
0
1
2
1 101 201 301 401 501
BBB: vintage 2vintage factor
-2
-1.5
-1
-0.5
0
0.5
1
1.5
2
1 101 201 301 401 501
BBB: vintage 2w orld factor
-5
-4
-3
-2
-1
0
1
2
3
1 101 201 301 401 501
Common
Vintage
Rating
Liquidity
Factor Contributions to 07-2 IndicesAAA: vintage 3
w orld factor
-2
-1.5
-1
-0.5
0
0.5
1
1 101 201 301 401 501
A: vintage 3w orld factor
-2.5
-2
-1.5
-1
-0.5
0
0.5
1
1.5
1 101 201 301 401 501
BBB: vintage 3w orld factor
-2
-1.5
-1
-0.5
0
0.5
1
1 101 201 301 401 501
AAA: vintage 3vintage factor
-0.00000005
0
0.00000005
0.0000001
0.00000015
0.0000002
0.00000025
0.0000003
0.00000035
1 101 201 301 401 501
A: vintage 3vintage factor
-0.0000001
0
0.0000001
0.0000002
0.0000003
0.0000004
0.0000005
0.0000006
0.0000007
1 101 201 301 401 501
BBB: vintage 3vintage factor
-0.0000000050
0.0000000050.00000001
0.0000000150.00000002
0.0000000250.00000003
0.0000000350.00000004
1 101 201 301 401 501
AAA: vintage 3ratings factor
-1.40E-09-1.20E-09-1.00E-09-8.00E-10-6.00E-10-4.00E-10-2.00E-100.00E+002.00E-104.00E-10
1 101 201 301 401 501
A: vintage 3ratings factor
-0.05-0.04-0.03-0.02-0.01
00.010.020.030.04
1 101 201 301 401 501
BBB: vintage 3ratings factor
-1.5
-1
-0.5
0
0.5
1
1 101 201 301 401 501
AAA: vintage 3liquidity factor
0123456789
1 101 201 301 401 501
A: vintage 3liquidity factor
0
1
2
3
4
5
6
7
8
1 101 201 301 401 501
BBB: vintage 3liquidity factor
0
2
4
6
8
10
1 101 201 301 401 501
Common
Vintage
Rating
Liquidity