Three Essays in Securitisation Pricing

This thesis combines various aspects of securitisation literature mainly focusing on the European securitisation market and consists of three empirical studies in securitisation pricing. In the first empirical study (Chapter II), we study the information content of ABS yield spread at origination. Previous studies demonstrate that agents within the chain of securitisation process can influence investor decisions in evaluating the price of ABS bonds and potential risks associated with such products. Legal advisors, one of the main parties who are actively involved in the set up and the selling of ABS bonds, are significant omission in the literature. The main objective of this study is determining the value of legal advisors through investor perspective in structured finance. Our findings indicate that legal advisors who had past partnership with issuers had positive impact on ABS transactions. Investors seem to have valued such experience as they have demanded less spread for those bonds.

The second empirical study aims to compare the boom and recovery periods of structured finance in relation to conflict of interest. Similar to the US, European Union has introduced several measures to improve transparency and tackle incentive problems. Credit Rating Agency (CRA) regulation, as part of the same initiative, has been implemented in three phases to strengthen regulation and supervision over rating agencies. The aim of this study is to investigate the effectiveness of such measures in tackling conflicts of interest. Our analyses reveal that the new rules have been effective in reducing conflicts of interest between rating agencies and issuers. However, we also find that issues such as rating shopping and rating over-reliance are still present to a certain degree. We conclude the chapter with our policy recommendations that might help in further improving the securitisation market in the EU.

The final empirical study examines the global securitisation market, including the US and the EU. This chapter highlights the significance of financial intermediaries in securitisation. The key purpose of this study is to investigate possible determinants of service fees received by ABS bond issuers. Financial intermediation is crucial in reducing information asymmetry in capital markets, particularly so in the market for structured bonds. Based on our estimations we find that top-tier investment banks are compensated better for the services they provide in comparison to less reputable banks. This positive relationship between issuer reputation and their service fee could be explained by a ‘premium fee - superior quality’ equilibrium 1. We also find the initial yield spread of ABS bonds can be an influential factor in evaluating issuers’ service charge.

1 Klein and Leffler (1981); Chemmanur and Fulghieri (1994).