On the Design of Sovereign Bond-Backed Securities

29 Pages Posted: 17 Dec 2019

See all articles by Emilio Barucci

Emilio Barucci

Politecnico di Milano - Department of Mathematics

Damiano Brigo

Imperial College London - Department of Mathematics

Marco Francischello

Imperial College Business School

Daniele Marazzina

Polytechnic University of Milan - Department of Mathematics

Date Written: December 1, 2019

Abstract

We analyze Sovereign Bond-Backed Securities, concentrating our attention on the return of the different tranches and on their risk. We show that as the correlation level among defaults increases, the yield rate of senior tranches increases while the yield rate of junior tranches decreases. A similar effect is observed when introducing a block dependence structure with high correlation among states belonging to the same block. Introducing a non-zero recovery rate, as opposed to a null recovery rate, decreases the yield rate of senior tranches and increases the yield rate of junior tranches. We compute the loss distribution and the Value at Risk (VaR) associated with the market risk of detaining the different tranches of the bond. We also analyze the possibility of reaching a safe asset through pooling tranches of government bonds of different States. In summary, we show that the issue in reaching a comprehensive and safe offering through the securitization of government bonds is not the safety of senior tranches but the risk of the junior ones.

Keywords: Sovereign bond-backed securities, tranches, diversification, Euro

JEL Classification: C60, F34, F36, F45, G28

Suggested Citation

Barucci, Emilio and Brigo, Damiano and Francischello, Marco and Marazzina, Daniele, On the Design of Sovereign Bond-Backed Securities (December 1, 2019). Available at SSRN: https://ssrn.com/abstract=3496155 or http://dx.doi.org/10.2139/ssrn.3496155

Emilio Barucci

Politecnico di Milano - Department of Mathematics ( email )

Piazza Leonardo da Vinci
Milan, Milano 20100
Italy

Damiano Brigo

Imperial College London - Department of Mathematics ( email )

South Kensington Campus
London SW7 2AZ, SW7 2AZ
United Kingdom

HOME PAGE: http://www.imperial.ac.uk/people/damiano.brigo

Marco Francischello (Contact Author)

Imperial College Business School ( email )

South Kensington Campus
Exhibition Road
London SW7 2AZ, SW7 2AZ
United Kingdom

Daniele Marazzina

Polytechnic University of Milan - Department of Mathematics ( email )

Via Bonardi, 9
Milano, MI 20133
Italy

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