An Empirical Study On Performance Of ABS In China And Its Wealth Effect On Equity

Securitization, as one of the most important innovations in finance since 1970s, is also a promising alternative approach to real estate financing. It was introduced to china in 2005, and has been developing increasingly rapidly in China during the past three years.This empirical study first investigates the performance of existing Asset-Backed Securitization (ABS) during the period from its inception in 2005 to September 2008 in comparison with the overall market, especially with emphasis on Mortgage-backed securitization (MBS) which is the original and the most important form of ABS. The Jensen Indices for Securities backed by different assets are generated from Capital Asset Pricing Model (CAPM) to measure the performance of each ABS sector relative to the market portfolio. A one-way analysis of variance (ANOVA) is conducted and the Tukey multiple comparison method is used to enable performance comparisons across ABS sectors. Event Study is then employed to study the wealth effect of securitization on equity holders of originators by examining changes in stock prices at the time of announcement and issuance. Finally, empirical results are analyzed with respect to relative studies and economic situation in China, and suggestions are made for investors, securitization originators, policy makers, and regulating agency.The results indicate that MBS carried the highest market risk as compared to other ABS sectors. The MBS sector underperformed automobile and nonperforming loan sectors. Moreover, asset backed securities generally out-performed the overall market. These findings suggest that ABS is generally a relatively safe investment vehicle providing hedging against the market risk. Therefore aggressive financial policies which encourage issuance and trading of ABS suggested for the government to employe. Wealth effect of securitization on equity is not significant in most cases. Sometimes it is even negative. But for some recent issuances, wealth effect of securitization has become significantly positive, indicating that securitization is beginning to benefit companies by improving its asset structure and reducing liquidity risk, and that the value securitization is starting to be recognized by investors.