Table 11 Predictive power of initial yield spreads during credit bubbles: Regressions with Predicted Spread

From: The predictive strength of MBS yield spreads during asset bubbles

  Full sample AAA Investment grade excluding AAA Non-Investment grade (< BBB−)
(1) (2) (3) (4) (5) (6) (7) (8)
Predicted spread 0.005** 0.001 0.006** 0.005 0.004 0.000 0.020** 0.016
  (0.002) (0.002) (0.002) (0.004) (0.004) (0.004) (0.008) (0.015)
Credit bubble 4.045*** 3.477*** 4.552*** 3.943*** 3.694*** 3.253*** 2.284*** 1.512
  (0.572) (0.577) (1.076) (1.060) (0.759) (0.809) (0.704) (2.332)
Credit bubble × predicted spread   0.009***   0.019***   0.005**   0.005
   (0.002)   (0.006)   (0.003)   (0.015)
Weighted average life 0.990*** 0.980*** 1.416*** 1.426*** 0.660*** 0.659*** − 0.396 − 0.403
  (0.099) (0.099) (0.117) (0.118) (0.154) (0.153) (0.325) (0.325)
Constant − 4.428*** − 3.653*** − 5.483*** − 4.529*** − 3.168* − 2.766 − 4.820** − 3.986*
  (0.931) (1.002) (1.357) (1.399) (1.699) (1.857) (2.226) (2.200)
Controls for         
 Credit ratings Yes Yes No No Yes Yes Yes Yes
 Years Yes Yes Yes Yes Yes Yes Yes Yes
Observations 4233 4233 1617 1617 2321 2321 273 273
Pseudo R-squared 0.225 0.231 0.266 0.301 0.223 0.225 0.208 0.227
  1. This table reports results of a two-stage estimation predicting the Downgrades of European MBS tranches on the log of predicted initial yield spreads and credit ratings. The sample includes all rated floating tranches issued between 1999 and June 2007. At the first stage (not reported) Spread is regressed on Weighted Average Life (the weighted average time until each monetary unit of principal is repaid), Retained (equals to 1 if at least one tranche is retained by the issuer, 0 otherwise), Subordination (the value of tranches in the same deal that have an equal or higher rating than the given tranche as a fraction of the total deal value), Tranche Size (the natural logarithm of the principal value of the relevant tranche is the value of tranche), Ratings/Tranches (the ratio of number of unique ratings in a deal to the total number of tranches in a deal), Collateral (indicates residential mortgages), Collateral Country (a set of dummy variables indicating the country where the underlying mortgages are issued). Credit Ratings (a set of dummy variables indicating the credit rating of the tranche at the issuance) and Year (a set of dummy variables capturing the effects of the macro environment). Reported results in the table are the second stage logit regressions predicting the Default. Credit Bubble equals to 1 if the deal is issued during the boom period of 2005 and the first half of 2007. Spread is the quoted spreads at issuance in excess of the benchmark, i.e. Euribor. Standard errors in parentheses are clustered at the deal level
  2. ∗∗∗, ∗∗, and ∗ represent significance at the 1%, 5%, and 10% levels, respectively