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Asset Securitizations and Credit Default Swaps

This study examines the effects of off-balance sheet versus on-balance sheet securitizations on the originator's credit risk in the default swap (CDS) market across the recent business cycle from 2002 to 2009. I find that on-balance sheet securitizations demonstrate greater effects on the originator's CDS premium than off-balance sheet securitizations in the business cycle. While off-balance sheet securitizations’ effects on the originator's CDS premium become significantly stronger after 2007 when the economy declines, on-balance sheet securitizations’ effects on the originator's CDS premium do not experience a significant change with the onset of the recession. The results suggest that the CDS market views originators as having greater probabilities not to honour their implicit guarantees for off-balance sheet securitizations during the economic downturn. The results also indicate that on balance sheet and off-balance sheet securitizations have distinctly different risk properties. It would be beneficial to investors if regulations take into considerations the changing credit risks of off-balance sheet securitizations and the different structures of asset securitizations.