Research On Asset Securitization Pricing

Asset securitization,after forty years of development,has become an important sector of the US fixed income markets and is a world leader in terms of market size,product type,institutional arrangements,pricing system and investor structure,etc.China‘s current economy has entered a new normal,under this context,it is quite necessary for the bond market to provide more support and service so as to ensure that the economy performs within an appropriate range and to reduce systemic risks.With the process of interest rate marketization,asset securitization,as an innovative bond market tool,lacks liquidity,but converting the assets with future cash flow into tradable securities caters to the change of banking business model and meets the institutional investors’ demand for low-risk and high-liquidity assets.However,the marketability of asset-backed securities is based on the pricing technologies,among which the accounting of asset pool cost and the construction of quantitative model are significant.With the increasing liberalization of China’s policies,constant perfection of trade mechanism and the continuous improvement of pricing methods,more and more investors will participate in the transactions of asset-backed securities.Perfect pricing system is bound to lay a solid foundation for the rapid development of asset securitization businesses in China.The particularity in the construction of asset securitization pricing model lies in its special risk characteristics,namely,prepayment risks and default risks(Lou,2009);therefore,asset securitization products are considered as debt financing instruments with various options.At present,the research on asset securization pricing focuses on the option pricing under relative valuation,and a large amount of literature researches are developing and reconstructing prepayment and default models.The pricing mechanism under relative valuation method is the measure under risk-neutral probability,namely,assuming the integrity of the market and the reproducibility of asset prices,so there are more current researches on the basis of the construction of interest rate model,but there is less cash flow model construction on the basis of real measure.This article studies the above relevant theories and practical issues from the following aspects.Firstly,this article reviews and summarizes the development status of asset securitization mainstream pricing methods.At first,the evolution of the most commonly used option method in the asset securitization pricing is dated back.Secondly,as the pricing researches on the mortgage-backed securities(MBS)and collateralized debt obligations(CDO)in the United States occupy a large proportion of its researches on the three major categories of assets securitized products,and the asset-backed securities(ABS),essentially consistent with MBS,is the promotion of MBS technologies on other assets;moreover,the United States has so extensive ABS products than cannot be elaborated at large,so the development process of MBS and CDO pricing research are arranged separately.Then,this article introduces the situation of asset securitization pricing research in China.In the end,a comparative analysis of the pricing method in this article and the existing pricing theories finds that the key point in the asset securitization pricing is to construct a model for the cash flow of asset portfolio in the asset pool,at the same time,consideration shall be given to the uncertainty of such cash flow in the future.However,the existing pricing methods mostly focus on the assumption and model construction of prepayment and default behaviors so as to obtain the option value of this two parts;meanwhile,path selection is built for the interest rate via different models under the risk-free measure,and finally asset securitized products are priced.In the current pricing methods,consideration is given to risks by different interest rate path simulations and prepayment as well as default behavior assumptions,and rarely given to the model construction from the point of view of real cash flow so as to price asset securitized products.Secondly,the article builds a general model for asset securitization pricing based on actuarial principle.A key link in the asset securitization pricing is asset pool design,namely,cost pricing and hierarchical design of asset pool.For asset securitization,the future cash flow from asset pool is the source to repay the principal of and interest on the securities supported.The generation of predictable cash flow by the asset pool is the basis of asset securitization.Therefore,what is securitized is not the asset itself but the cash flow of asset pool through combination.The initiator of asset securitization,according to his/her own securitization goals,generates the underlying assets for expected cash flow through selection,classification and combination to guarantee successful repayment of securities supported.For securities design,the initiator may,based on the risk preference of investors,make different stage division and credit improvement.Therefore,the most important centre of asset securitization pricing lies in the cost pricing of asset pool;and the key to such pricing is to estimate the uncertain future cash flow from underlying assets in the asset pool.Based on the features of operation of asset securitization,the underlying assets must insist on the following selection standards: a large amount of assets;similar asset characteristics;wide distribution of territory and demographic statistics of debtors;stable and predictable cash flow;steady asset records;the former creditor holds the assets for a long time and keeps sound credit records.These features highly correspond to those of actuarial principle which is based on law of large numbers and requires big quantity and homogenization.Then,the article,under the precondition of review and sort-out of actuarial principle,has the following findings: firstly,the asset securitization products will produce cash inflow and outflow in each future period and various risks will affect the amount of cash flow.Therefore,the research on future life distribution in the life contingencies pricing may be adopted through analogy in the asset securitization pricing.Secondly,the multimode Markov Model is composed of modes featuring fixed numbers,causing the possibility of mutual transition and corresponding transition probability among different modes.However,theses transition probability may help design policy and calculate premium and provision,which is a method different from traditional life contingencies model,and will,especially where there is different health status classification and status transition,better exert its advantages.Therefore,this article divides the future cash flow from asset securitization into five modes: normal repayment,repayment in full,repayment in part,suspension of repayment,overdue repayment;and on this basis,builds a general model for asset securitization pricing through multimode Markov Model.Thirdly,the article respectively builds and perfects the pricing model for major asset securitization products(RMBS,Auto-ABS and CLO)issued in China through the established general pricing model,completes model test and assessment by means of empirical analysis,and checks the reasonability of pricing methods under the actuarial principle via practical cases.Firstly,the article,based on the established general pricing model,and in combination with the features of RMBS,builds a model for actuarial pricing of cash flow from RMBS featuring catastrophe,and carries out empirical test through Youyuan 2014-1RMBS,and calculates the initial cost of asset pool and cash flow of each period.In addition,by making sensitivity analysis on interest rate,probability of default,and partial repayment proportion against the results,it is found that the error between the cost of asset pool determined by calculating the cash flow based on the model built in this article and that of initial asset pool in this case is 1.12%,verifying the model built in this article is better.The above results have shown the cash flow condition of Youyuan 2014-1RMBS in corresponding period.Therefore,with regard to every time-point(t),we will know the specific amount that has been paid and the balance of loan corresponding to each t.Later,the article,by making analysis on the term structure and design plan of securities based on cash flow of RMBS,finds that at the securitization product design stage,each level may determine respective weighted average term under the assumption of different conditional prepayment rate(CPR),or determine the term structure of each level based on roadshow communication to investors at different levels and market situation.The model built in this article may help calculate the proportion of the paid amount in the total loan amount under different term structure,and make corresponding division according to the terms requested by investors at each level with credit enhancement and other costs being taken into account so as to determine the price of securitization products at different level.Secondly,this article,in combination with the general model and the features of Auto-ABS,builds a actuarial model for cash flow from Auto-ABS featuring automobile depreciation and default,and finds that the error between the cost of asset pool and that of initial asst pool in this case is 1.03% by conducting empirical test through Weiying 2015-1 Auto-ABS,perfectly verifying the general model built in this Article.The biggest difference in building pricing model for Auto-ABS and RMBS lies in the mortgage asset of Auto-ABS-the automobile belongs to consumables,whose value will quickly decrease with the passage of time.Within a short term upon occurrence of loan,the balance of automobile loan may be higher than the value of the automobile itself,when the rational economic man will be mostly likely to make default treatment.Auto-ABS may be exposed to default risks.Thirdly,this article makes research on the applicability of the general model for actuarial pricing to other kinds of asset securitization products.With the continuous development of domestic financial market,the demand for various types of asset securitization in China keeps increasing.Therefore,only by continuing to improve the pricing methods,more and more investors will be willing to participate in asset securitization product transactions and the pricing system will be more and more perfect.The improvement of pricing methods is the basis of fast development of future asset securitization service in China.To sum up,the core viewpoints and conclusion of this article are as follows:Introducing actuarial principle in asset securitization pricing is reasonable.Actuarial science is an application discipline,which is aimed to estimate and analyze the effect of uncertain future events.The fact that any financial issues involving uncertainty may be analyzed and solved based on actuarial principle provides a theoretical basis for asset securitization pricing through actuarial methods.In each period,the asset securitization products will produce cash inflow and outflow and be exposed to various risks,which will affect the amount of cash flow.However,the research on future life distribution in the life contingencies pricing will also take the cash flow and its risk influence factors into account,which highly corresponds to the mechanism for pricing of asset securitization.From the perspective of theory,the model algorithm built in this article may apply to any type of asset securitization products.If in the future,the asset pool of asset securitization products will realize informatization on a case-by-case basis by building exclusive database for asset pool of securitization production,the model algorithm built in this article may be adopted to realize programming productization or used as a tool product to measure and calculate information and value of various asset securitization products.When a securitization product has the information required in the above database,the model algorithm built in this article may calculate the value of asset pool of asset securitization and provide further strategic support in data and theory for subsequent development of products.Compared with the existing researches,this article displays the following innovations:(1)This article introduces actuarial methods in the asset securitization pricing and builds a normative actuarial method model for asset securitization pricing.The article introduces actuarial methods in the asset securitization product pricing for underlying assets featuring big quantity and high degree of homogenization and builds the multimode Markov Model based on law of large numbers,and actuarial principle and methods,makes state analysis on the cash flow repaid by the debtors and builds a theoretical model for repayment behavior of debtor.Specifically,firstly,the article divides the cash flow repaid by debtor in the asset securitization into different modes: normal repayment,repayment in advance and in full,repayment in advance and in part,suspension of repayment and overdue repayment;then,quantizes the risk factors(advance repayment risk and default risk,etc.)that asset securitization pricing may be exposed to which may affect cash flow through transition probability during Markov process;and finally,estimates the cost of asset pool and cash in each period based on concept of actuarial present value and actuarial equivalence principle.(2)This article provides new exploration thinking for asset securitization pricing from two aspects of theory and demonstration.This article builds a normative actuarial pricing model for asset securitization,and in combination with the risk features of asset securitization products issued in China,applies actuarial pricing principle to various kinds of asset securitization products.In addition,the article,through the model built,estimates the cost of asset pool and cash flow in each period of the issued products in connection with RMBS and Auto-ABS,and compares such estimated value with initial cost of asset pool in the current market,showing a reasonable result.Meanwhile,based on the forecast of cash flow in each period,the article provides suggestion for term structure and design plan of securities.With the quick development of asset securitization market,the pricing model in this article may be widely applied upon modification and perfection based on risk features of underlying assets of various kinds of assets securitization products,providing an innovative thinking for exploration of methods for pricing of asset securitization.