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

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in lo

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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

Actual Liquidity Factor

• We find that wt is proportional to xA,t essentially, so we can write this

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

Liquidity Factor

0

2

4

6

8

10

12

14

Jan-06 Jun-06 Nov-06 Apr-07

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

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