Risk Analysis for Securitisation Portfolios

The models presented in this note 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. The models presented include a flexible Monte Carlo-based framework in which multi-period securitisations with complex cash-flow waterfalls may be represented and a simple, stylised analytical model, the Arbitrage Free Approach (AFA) (as proposed by Duponcheele, Perraudin and Totouom-Tangho (2013)).

We implement the Monte Carlo approach within a flexible portfolio modelling software called RC-Capital Model. 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.

We show in a case study of Spanish and Portuguese SME-loan-backed securitisation tranches that our Monte Carlo model provides intuitively reasonable risk measures. Using it, we calculate Marginal Value at Risk (MVaR) measures and show that they are correlated across individual exposures with familiar risk drivers such as attachment point, maturity and agency rating. When implemented under comparable assumptions, the Monte Carlo-based capital numbers also exhibit high cross-sectional correlations with those implied by the AFA and with regulatory capital.

Differences between the capital implied by the Monte Carlo and analytical models reflect the more realistic modelling of the cash-flow waterfall possible within the former and differences in the modelling of pool loan defaults. (This modelling is multi-period in the Monte Carlo model and single-period in the stylised models.)

Paper available here.

(This is an updated version of the paper entitled How to Analyse Risk in Securitisation Portfolios.)