Encyclopedia of Quantitative Finance, IV Volume Set

ABS Indices

Asset back securities (ABS) are financial debt securities based on a pool of underlying assets or collateral assets. When the assets are backed by mortgages, they are called mortgage backed securities (MBS). ABSs are backed by nonmortgage assets. This includes auto loans, credit card receivables, home equity loans, student loans, and so on. Owing to government guarantees, MBS typically entail no credit risk. However, ABSs generally lack such guarantees, so they entail credit risk. It might be for this reason that ABS backed by subprime mortgages are still called ABS, or more explicitly, subprime residential mortgage-backed security (RMBS) instead of MBS.

The basic building blocks of credit derivatives are credit default swaps (CDS). It was the standardization of the settlement terms and conditions of the corporate CDS contracts by International Swaps and Derivatives Association (ISDA) in early 1990s that allowed the corporate CDS market to grow and evolve quickly. The credit risk in subprime RMBS differs in fundamental ways from credit risk in corporate bonds. ISDA published its first pay-as-you-go (PAUG) CDS documentation for RMBS in June 2005, and followed up with amended versions in April 2006 and November 2006. This ISDA documentation standardization for PAUG CDS on sub-prime RMBS helped create a synthetic CDS market on the subprime RMBS bonds. In late 2005, 15 ...