On the design of sovereign bond-backed securities
File(s)
Accepted version
Author(s)
Barucci, Emilio
Brigo, Damiano
Francischello, Marco
Marazzina, Daniele
Type
Journal Article
Abstract
In this paper, we analyze Sovereign Bond-Backed Securities in the Euro area, concentrating our attention on the return of the different tranches and on their riskiness. We show that as the correlation level among States increases, the yield rate of senior tranches increases while the yield rate of junior tranches decreases. A similar effect is observed when introducing a block dependence structure with high correlation among States belonging to the same block. Introducing a nonzero recovery rate, as opposed to a null recovery rate, decreases the yield rate of senior tranches and increases the yield rate of junior tranches. We compute the loss distribution and the Value at Risk (VaR) associated with the market risk of retaining the different tranches of the bond. We also analyze the possibility of reaching a safe asset through pooling tranches of government bonds of different States. In summary, we show that the issue in reaching a comprehensive and safe offering through the securitization of government bonds is not the safety of senior tranches but the risk of the junior ones.
Date Issued
2021-06-23
Date Acceptance
2021-05-16
Citation
International Journal of Financial Engineering, 2021, 9 (1), pp.1-1
ISSN
2424-7863
Publisher
World Scientific Publishing Co Pte Ltd
Start Page
1
End Page
1
Journal / Book Title
International Journal of Financial Engineering
Volume
9
Issue
1
Identifier
https://www.worldscientific.com/doi/abs/10.1142/S242478632150033X
Publication Status
Published
Date Publish Online
2021-06-23