Abstract
Asset-backed securitization (ABS) is a relatively new financial instrument in Singapore's capital market, which has been accepted by developers (originators) as an alternative source of financing. Credit assessment and rating requirements have not been imposed on the ABS bond issues. Default-risk evaluation has also been understated, if not omitted, in the process of structuring ABS deals. This is the first study that applies a theoretical default-risky swaps valuation model to evaluate credit risks in ABS bonds in Singapore. The Monte-Carlo simulation results, based on the Century Square shopping mall ABS case, show significant effects of the changes in rental volatility and default-free interest rate volatility on the default-risk premium of swap. More specifically, an increase in the rental volatility reduces the default-risky swap values significantly. However, an increase in the instantaneous default-free interest rate volatility increases the default-risk premium of swaps, and this effect is only observed in the high default-free interest rate volatility regime (above 20 percent). The results suggest that the rental dynamics of the securitized real estate are critical in determining the default risks of ABS deals. The fixed-rate (coupon yield) and floating-rate (rental cash flows) should therefore be adequately determined to reflect the default risks, which may be caused by the rental dynamics of the securitized real estate.
This is a preview of subscription content, log in via an institution to check access.
Similar content being viewed by others
References
Abken, P. A. (1990). “Valuing Default-Risky Interest Rate Caps: A Monte-Carlo Approach,” Federal Reserve Bank of Atlanta Working Paper 90-5.
Abken, P. A. (1993). “Valuation of Default-Risky Interest-Rate Swaps,” Advances in Futures and Options Research 6, 93–116.
Arnold, L. (1974). Stochastic Differential Equations: Theory and Applications. New York: John Wiley & Sons.
Baum, A. E., C. J. Beardsley, and C. W. R. Ward. (1999). “Using Rental Swaps and Sales to Manage Portfolio Risk and to Fund Property Development,” University of Reading Working Paper.
Black, F., and J. Cox. (1976). “Valuing Corporate Securities: Some Effects of Bond Indenture Provisions,” Journal of Finance 31, 351–367.
Brennan, M. J., and E. S. Schwartz. (1980). “Analyzing Convertible Bonds,” Journal of Financial and Quantitative Analysis 15(4), 907–929.
Brent, R. P. (1993). Algorithms for Minimization Without Derivatives. Englewood Cliffs, NJ: Prentice Hall.
Chan, K. C., G. A. Karolyi, F. A. Longstaff, and A. B. Sanders. (1992). “The Volatility of Short Term Interest Rates: An Empirical Comparison of Alternative Models of the Term Structure of Interest rates.” Journal of Finance 47, 1209–1227.
Chance, D. M. (1990). “Default Risk and the Duration of Zero-Coupon Bonds,” Journal of Finance 45, 265–274.
Cooper, I., and A. Mello. (1991). “The Default Risk of Swaps,” Journal of Finance 46, 597–620.
Cox, J. C., J. Ingersoll, and S. Ross. (1985). “A Theory of the Term Structure of Interest Rates,” Econometrica 53, 385–407.
Duffie, D., and M. Huang. (1996). “Swap Rates and Credit Quality,” Journal of Finance 51(3), 921–949.
Duffie, D., and K. Singleton. (1999). “Modeling Term Structures of Defaultable Bonds,” Review of Financial Studies 12(4), 687–720.
Gibbons, M. R., and K. Ramaswamy. (1993). “A Test of the Cox, Ingersoll, and Ross Model of the Term Structure,” Review of Financial Studies 6(3), 619–658.
Harrison, M., and D. Kreps. (1979). “Martingales and Arbitrage in Multiperiod Security Markets,” Journal of Economic Theory 20, 381–408.
Hübner, G. (2001). “The Analytic Pricing of Asymmetric Defaultable Swaps,” Journal of Banking & Finance 25, 295–316.
Hull, J., and A. White. (1993). “One-Factor Interest-Rate Models and the Valuation of Interest-Rate Derivative Securities,” Journal of Financial and Quantitative Analysis 28(2), 235–254.
Ingersoll, J. (1987). Theory of Financial Decision Making. Totowa, NJ: Rowman and Littlefield.
Jarrow, R., and S. Turnbull. (1995). “Pricing Derivatives on Financial Securities Subject to Credit Risk,” Journal of Finance 50(1), 53–85.
Jarrow, R., D. Lando, and S. Turnbull. (1997). “A Markov Model of the Term Structure of Credit Risk Spreads,” Review of Financial Studies 10(2), 481–523.
Johnson, H., and R. Stulz. (1987). “The Pricing of Options with Default Risk,” Journal of Finance 42, 267–280.
Kim, I. J., K. Ramaswamy, and S. Sundaresan. (1993). “Does Default Risk in Coupons Affect the Valuation of Corporate Bonds?: A Contingent Claims Model,” Financial Management 22(3), 117–131.
Longstaff, F. A. (1990). “The Valuation of Options on Yields,” Journal of Financial Economics 26, 97–121.
Merton, R. C. (1974). “On the Pricing of Corporate Debt: The Risk Structure of Interest Rates,” Journal of Finance 29, 449–470.
Merton, R. C. (1977). “On the Pricing of Contingent Claims and the Modigliani-Miller Theorem,” Journal of Financial Economics 5, 241–249.
Sing, T. F., S. E. Ong, and C. F. Sirmans. (2003). “Asset-Backed Securitization in Singapore: Value of Embedded Buy-Back Options,” Journal of Real Estate Finance and Economics 27(2), 173–189.
Smith, C. W., C. W. Smithson, and L. M. Wakeman. (1986). “The Evolving Market for Swaps,” Midland Corporate Finance Journal 3, 20–32.
Smith, C. W., C. W. Smithson, and L. M. Wakeman. (1988). “The Market for Interest Rate Swaps,” Financial Management Winter, 34–44.
Sorensen, E. H., and T. F. Bollier. (1994). “Pricing Swap Default Risk,” Financial Analysts Journal 50(3), 23–33.
Sundaresan, S. (1991). “Valuation of Swaps,” In S. Khoury (ed.), Recent Developments in International Banking and Finance. Amsterdam: North Holland.
Zhou, C. (1997). “A Jump-Diffusion Approach to Modeling Credit Risk and Valuing Defaultable Securities”, Federal Reserve Board Working Paper.
Author information
Authors and Affiliations
Rights and permissions
About this article
Cite this article
Sing, T.F., Ong, S.E., Fan, G. et al. Analysis of Credit Risks in Asset-Backed Securitization Transactions in Singapore. The Journal of Real Estate Finance and Economics 28, 235–253 (2004). https://doi.org/10.1023/B:REAL.0000011155.30320.73
Issue Date:
DOI: https://doi.org/10.1023/B:REAL.0000011155.30320.73