Reading 8 - Stulz Risk Mgmt Failure
- Thread starter tosuhn
- Start date
Meredius
New Member
Hi tosuhn,
I'll try to answer. (I also hope David and Nicole take a well deserved vacation after all the work they've put in these last few months)
A quick Google search reveals information here: http://www.markit.com/Product/ABX
Wikipedia entry here: http://en.wikipedia.org/wiki/Asset-backed_securities_index
Mortgage risk pricing article here (probably overkill but I have a penchant for structured products but I feel the article covers FRM related challenges): http://www.bis.org/publ/qtrpdf/r_qt0809h.pdf
Also paraphrasing one of David's answers referring to Stulz:
Stulz: "One of the most obvious demonstrations of how risk exposures can change is the pricing of subprime derivatives. The ABX indices have been the most readily available data on the value of securities issued against subprime mortgage collateral. The indices are equally-weighted averages of credit-default swaps on securitization tranches. New indices were created every six months, reflecting new securitizations. Initially, the AAA indices, which represent the pricing of credit default swaps on AAA-rated tranches of securitizations, exhibited almost no variation, so that reasonable assessments of the risk of the AAA-rated tranches of securitizations using historical data would have been that they had little risk. Yet, suddenly, the value of these securities fell off a cliff as shown on Figure 1. Holders of AAA-rated tranches of subprime securities made sudden large losses if they chose to use the ABX indices as proxies for the value of their holdings."
... and his key point is: "When the risk characteristics of securities can change very rapidly, it is challenging for risk monitors to capture these changes and for risk managers to adjust hedges appropriately."
Hope this helps.
I'll try to answer. (I also hope David and Nicole take a well deserved vacation after all the work they've put in these last few months)
A quick Google search reveals information here: http://www.markit.com/Product/ABX
Wikipedia entry here: http://en.wikipedia.org/wiki/Asset-backed_securities_index
Mortgage risk pricing article here (probably overkill but I have a penchant for structured products but I feel the article covers FRM related challenges): http://www.bis.org/publ/qtrpdf/r_qt0809h.pdf
Also paraphrasing one of David's answers referring to Stulz:
Stulz: "One of the most obvious demonstrations of how risk exposures can change is the pricing of subprime derivatives. The ABX indices have been the most readily available data on the value of securities issued against subprime mortgage collateral. The indices are equally-weighted averages of credit-default swaps on securitization tranches. New indices were created every six months, reflecting new securitizations. Initially, the AAA indices, which represent the pricing of credit default swaps on AAA-rated tranches of securitizations, exhibited almost no variation, so that reasonable assessments of the risk of the AAA-rated tranches of securitizations using historical data would have been that they had little risk. Yet, suddenly, the value of these securities fell off a cliff as shown on Figure 1. Holders of AAA-rated tranches of subprime securities made sudden large losses if they chose to use the ABX indices as proxies for the value of their holdings."
... and his key point is: "When the risk characteristics of securities can change very rapidly, it is challenging for risk monitors to capture these changes and for risk managers to adjust hedges appropriately."
Hope this helps.
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