Through the looking glass

Investors typically pursue buy-and-hold strategies when it comes to asset-backed securities (ABS), making fair value assessment of portfolios difficult and limiting transparency. But the massive mortgage devaluation since last year means there is an increased need to calculate the worth of ABS instruments. Bill Hunt, Richard Hrvatin, and Ahmet Kocagil from Fitch Solutions come up with a new approach

This article illustrates two methodological tools for the evaluation of asset-backed securities (ABS) instruments and portfolios.

The first methodology calculates 'benchmark cash prices' for ABS tranches using descriptive and performance measures, as well as the asset-backed credit default swaps (CDS) quotes on them, where they are available.

By employing this methodology, one can fit a pricing curve across different tranches in the same deal, and perform pricing for tranches with similar