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Please use this identifier to cite or link to this item:
http://hdl.handle.net/2451/27001
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| Title: | Analysis of Senior-Subordinated Structures Backed by Private-Label Mortgages |
| Authors: | John, Klose
Liu, Crocker
Radhakrishnan, R A |
| Issue Date: | Feb-1998 |
| Series/Report no.: | FIN-98-047 |
| Abstract: | This paper does a valuation analysis of senior-subordinated structure
tranches backed by non-agency mortgages. The valuation is done using
Monte Carlo simulation and employs the CIR interest rate process in
conjunction with an empirical model estimated for non-agency mortgage
prepayments and defaults. The sensitivity of the value of tranches to a
number of variables are analyzed. We find that the interest rate process
parameters significantly affect prepayments and defaults but not the
relative value of the senior tranche. It is found that with the shifting
of prepayments, the senior trances does not dominated all the junior
tranches at all interest rates. The shifting of prepayments has the
unintended effect of providing stability to the junior tranches by
making their cashflows less sensitive to prepayments. Our main
conclusion is that while the shifting of prepayments increases
protection from default to the senior tranche for a given level of
subordination, it has the unwanted effect of lowering its value through
increased contraction risk. The value loss should be taken into account
in determining the optimum level of subordination. |
| URI: | http://hdl.handle.net/2451/27001 |
| Appears in Collections: | Finance Working Papers
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