How to Analyse Risk in Securitisation Portfolios

Paper available here.

Non-technical summary available here.

Authors: Jozsef Kutas and William Perraudin

This paper analyses risk in a portfolio of Spanish and Portuguese Small and Medium Enterprise (SME)-loan-backed securitisations using a ‘look through’ technique.

The approach involves modelling the cash flow waterfall of securitisation deals constructed on top of a stochastic model of pool asset performance. The model is implemented using Monte Carlo methods and can represent realistically complex cash flow waterfalls in a rigorous fashion.

The Monte Carlo approach is implemented within a flexible portfolio modelling software called Risk ControllerTM. The software supports analysis of multi-currency portfolios comprising bonds, equities and derivatives of various types. Hence, the contribution of securitisation exposures to wider portfolios of instruments may be accurately computed.

The models presented in this note (both numerical and analytical) constitute a toolbox of rigorous techniques for analysing securitisation portfolio risk. As such, they permit the user to analyse with confidence the risks in holding securitisation exposures, to understand the risk return trade-offs for such exposures and appropriate levels of capital.