ABSTRAK and the Greeks: The Mathematics of Valuing Structured Securities in the Secondary Market

Abstract

Since the publication of U.S. SEC Regulation AB in 2005, the securitization market has made substantial progress in accepting the need to standardize collateral data. However, to revive the market, the valuation framework for ABS, RMBS, and their derivatives also needs to be standardized. The authors argue that the most data-responsive valuation framework for structured securities is based not on Black–Scholes (where the risk analysis is circular, being reliant on ratings) but on classical fixed income mathematics—both the price of a bond and Taylor series approximations—with an adjustment for endogenous shifts in the credit quality of seasoning structured securities.

TOPICS: Options, interest-rate and currency swaps