Table 5 Predictive power of initial RMBS yield spreads during credit bubbles

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)
Spread 0.008*** 0.007*** 0.085*** 0.025 0.010*** 0.006** 0.007** 0.005*
  (0.002) (0.002) (0.016) (0.016) (0.002) (0.003) (0.002) (0.003)
Credit bubble 4.181*** 3.799*** 5.796*** 2.864** 4.372*** 2.605*** 2.557*** 1.962
  (0.637) (0.634) (1.151) (1.218) (0.915) (0.892) (0.724) (1.298)
Credit bubble × spread   0.010***   0.144***   0.036***   0.002
   (0.003)   (0.033)   (0.008)   (0.004)
Weighted average life 1.008*** 1.018*** 1.155*** 0.954*** 0.705*** 0.691*** − 0.147 − 0.118
  (0.097) (0.100) (0.143) (0.157) (0.147) (0.150) (0.332) (0.329)
Constant − 5.583*** − 5.458*** − 7.812*** − 5.564*** − 5.782*** − 5.969*** − 2.073 − 1.667
  (1.844) (1.850) (1.189) (1.140) (1.030) (1.011) (1.278) (1.485)
Controls for         
 Credit ratings Yes Yes No No  Yes Yes Yes Yes
 Years Yes Yes Yes Yes Yes Yes Yes Yes
Observations 3360 3360 1327 1327 1813 1813 205 205
Pseudo R-squared 0.210 0.222 0.259 0.279 0.208 0.241 0.229 0.230
  1. This table reports logit regressions of the Downgrades of European RMBS tranches on the log of initial yield spreads and credit ratings. The sample includes all rated floating tranches issued between 1999 and June 2007. 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. Weighted Average Life of a bond is computed as the weighted average time until each monetary unit of principal remains outstanding. Credit Rating is a factor variable controlling for the fixed effect of individual credit rating indicators at the tranche level. Time is a factor variable consisting of the issuance periods annually. Standard errors in parentheses are clustered at the deal level
  2. ∗∗∗, ∗∗, and ∗ represent significance at the 1%, 5%, and 10% levels, respectively