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Securitization is widely used around the world, and structured products are one of the largest fixed-income asset classes. This textbook guides readers through the complexity of this financial technique and first introduces them to the mechanics of securitization and makes the key concepts, techniques and logic of this field accessible for teachers and students alike. Further, the textbook presents a systematic economic analysis of securitization, asking and answering why it exists, how it works, why it has failed, how complex structures operate, why they are so complex, and many other related questions. The author offers a unique approach, and combines detailed discussions of theoretical economics models with advanced empirical research in order to confront them to the perspective of an experienced practitioner in this market.


Inhaltsverzeichnis

Frontmatter

1. Introduction to the Economics of Securitization

Abstract
This chapter briefly introduces the economics of securitization. We first define securitization as an academic field of study, and then lay out the book’s plan. Finally, we give some indications on notations and on some mortgage data that is used throughout the book.
Laurent Gauthier

2. Overview of Securitization and Securitized Products

Abstract
This chapter is a rapid tour of the basics of securitization. We define a few terms and follow the cash flows in a typical securitization. Then we see how the various types of securitized products are generally categorized, and that the securitized bonds markets are very sizable. We provide an overview of the types of securitized bonds that are most common, without yet going into the details of their structures. We also present the trading mechanics applicable to these bonds, as they are quite particular and in some cases fairly complex. Finally, we briefly address some valuation techniques for securitized bonds and stress the importance of negative convexity.
Laurent Gauthier

3. Overview of Loan Portfolio Analysis

Abstract
In this chapter we delve into the analysis of loan portfolios. As one of the main raw materials of securitization, large portfolios of loans require specific formal and practical tools for their analysis and we go through the main ones in this part of the book. The first section categorizes the various types of loans that one might encounter, and explains why at the core all these sorts of loans can be analyzed in a similar way. We nevertheless contrast corporate and consumer loans and how their differences lead to a differential treatment in securitization. Then we look into a loan’s life cycle and how that can be represented as a transition matrix. Next, we discuss loan performance metrics and a few conventions. We then address loan behavior and discuss the drivers of prepayments and defaults, without going into the details of advanced modeling. We apply the general framework of loan behavior analysis to loan-level data on agency mortgages. We study refinancings and other forms of prepayment patterns, delinquencies and loss severities, and propose basic empirical models that capture their essential drivers. Next, we lay out practical methods for modeling loan cash flows, which are essential as an input into structures. Finally, we take a look at some formal ways of representing loan performance.
Laurent Gauthier

4. Incentives and the Economics of Securitization

Abstract
This chapter addresses the economics of securitization at a fundamental level. We first see how, in theory, securitization should not exist. Then we look into various economic models that can explain not only why securitization actually exists, but also why it makes use of certain fundamental structuring tools. We effectively decompose the notion of the existence of securitization into the existence of its fundamental components. First, for securitization to exist, selling assets needs to be optimal. Second, for securitization to exist as debt issuance, there has to be some optimality in debt versus equity or other forms of securities issuance. To address the first part of the question, we look through various explanatory factors which are considered to be taxes, bankruptcy or regulatory costs, and certain synergies and asymmetries in information. We analyze a range of models and discuss their relevance in light of empirical studies. Then, we turn to the justification of debt financing in securitization. We study various models explaining how the optimal financing security that will not be mispriced by investors takes the form of debt. Finally, we look into how well these models account for reality.
Laurent Gauthier

5. Problems with Securitization

Abstract
In this chapter, we look into some of the problems that it raises from an economic standpoint. We begin by characterizing some of the problems with securitization using the loan-level performance data on agency mortgages. In particular, we show the massive jump in delinquencies on loans that were thought to be of the best quality. Then, we walk through theoretical and empirical models that explain how securitization would have favored a decline in the quality of the loans that were originated. Finally, we explain how securitization may have been used as a regulatory arbitrage tool and examine some empirical research on the subject.
Laurent Gauthier

6. Structuring Securitized Bonds

Abstract
This chapter concentrates on the study of cash flow structuring, an essential aspect of securitization. The cash flows from the assets in a securitization are allocated to various bonds, following particular rules. These rules allow for the creation of bonds that have better, or worse characteristics than the underlying collateral. We first discuss the underlying logic of structuring and the broad tools of the trade. Then, we offer a simplified taxonomy of structure types, and in the subsequent sections go through these various methods. These include subordination, over-collateralization, sequential payments, and many others. We also address how different types of structuring approaches are usually combined in a securitization, and cover a few examples. We explain the logic with which various layers of structures are applied. We provide simple algorithmic descriptions of most of the structuring techniques we discuss, and we measure their efficiency across a large range of simulated scenarios.
Laurent Gauthier

7. The Economics of Securitization Structuring

Abstract
In this chapter, we examine the economics of securitization structures in order to make sense out of structural complexity. We first go through several economic models that can explain certain general aspects of securitization structures, in particular, the pooling of assets and the creation of layers of comparably structured bonds but with different degrees of risk. Then, we look into the handling of interest and principal specifically, in order to account for structuring techniques such as excess-spread or NIMs. We explain securitized product investor’s desire for par-priced bonds and show how this drives the use of complex interest and principal allocation methods. Finally, we walk through several empirical studies on structuring, which put the theoretical models to the test.
Laurent Gauthier

8. Problems in Securitization Structuring

Abstract
Although the existence of complex structures may be justified, in this chapter, we look into some of the problems raised by structuring. First, we characterize some symptoms of why structuring may not work for the benefit of investors. Then, we drill down into the issues related to structural complexity. We examine the behavior of certain complex bonds and show that their structure effectively amplifies the exposure to risks that are difficult to measure. We follow some empirical studies that also show that more complex structures have tended to underperform simpler ones. Finally, we look into ratings following several empirical research papers that show evidence of rating shopping and influence.
Laurent Gauthier

9. Conclusion of Securitization Economics

Abstract
This chapter briefly concludes the book.
Laurent Gauthier
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