1. Vintage and Credit Rating What matters in the ABX data during the credit crunch? Mardi Dungey Gerald P. Dwyer Thomas Flavin

2. Purpose of Paper Vintage, credit rating and liquidity parts of prices of collateralized debt obligations (CDOs) Using Markit indices of prices –CDOs based on subprime mortgages –New indices in January 2006, July 2006, January 2007 and June 2007

5. Correlations of Changes in Log Indices AAA06-1A06-1BBB06-1AAA07-2A07-2BBB07-2 AAA06-1 10.7450.5560.7770.4290.336 A06-1 0.74510.7150.6790.5870.456 BBB06-1 0.5560.71510.4850.6060.493 AAA07-2 0.7770.6790.48510.5050.355 A07-2 0.4290.5870.6060.50510.485 BBB07-2 0.3360.4560.4930.3550.4851

8. Factor Model –where vintage i=06-1, 07-1, 07-2 –rating j=AAA, A, BBB –t is time –y i,j,t is the change in the logarithm of the ABX series of vintage i with rating j at time t –fw t is the “world factor” at time t –v i,t is the vintage factor for vintage i at time t –k j,t is the ratings factor for rating j at time t –f i,j,t is the idiosyncratic factor for vintage i with rating j at time t –liq t is a separately estimated factor at time t

9. “Liquidity” Factor liq t is an idiosyncratic factor estimated from CDS premia over 3-month Treasury bills –where x i.t is the “excess return” on asset i at time t over 3-month Treasury bills –i includes CDSs, AAA corporate bonds and A corporate bonds –w t is a common factor – f i.t is an idiosyncratic factor

10. Actual Liquidity Factor We find that w t is proportional to x A,t essentially, so we can write this

11. Estimation Estimate GARCH(1,1) models for the changes in log price series before estimation Include dummy variables that deal with the non-synchronous starts of series Estimate by Kalman filter Data through May 30, 2008

13. Factor Contributions to 06-1 Indices Common Vintage Rating Liquidity

14. Factor Contributions to 07-1 Indices Common Vintage Rating Liquidity

15. Factor Contributions to 07-2 Indices Common Vintage Rating Liquidity

16. Conclusion Work in Progress We think we’ve made some progress in identifying a factor indicating liquidity and counterparty risk We interpret the estimation as being promising for estimating factors’ importance for CDO prices