About a-team Marketing Services
The knowledge platform for the financial technology industry
The knowledge platform for the financial technology industry

A-Team Insight Blogs

Julius Finance Calls for Standardised House Price Appreciation Scenarios for CDO Valuations

Subscribe to our newsletter

Standardised house price appreciation scenarios should be used in the valuation of complex financial products such as mortgage backed CDOs, according to Julius Finance, CDO valuation technology provider. Peter Cotton, CEO of Julius Finance, explains that a “rigorous approach” is needed to accurately price these products.

Julius Finance provides standardised scenarios for corporate defaults using model fusion technology, says Cotton, who claims that its valuations are the first internally consistent methodology to be deployed in this space.

Cotton explains: “The old saying about the whole being greater than the sum of its parts does not apply to CDOs. For years, banks have been able to tranche up CDOs and sell the slices for more than the cost of the pie – with inconsistent valuation and ratings models not exactly standing in the way. Now, there is the possibility of the entire financial community playing that game on a vast scale with the taxpayer on the other end of the deal.”

Julius Finance’s solution involves a set of agreed standardised scenarios for home price appreciation, combined with detailed loan level modelling of prepayment and default based on millions of historical data points, he says. A precedent is provided by the American Academy of Actuaries, which provides standardised equity return and interest rate scenarios used by insurance companies in the calculation of risk based capital. The procedure ensures that securities cost the same as the sum of the constituent parts, he continues.

“What’s required is a rigorous approach, in the sense that one cannot magically create value by slicing, dicing and rearranging alone. This provides an important constraint on what might otherwise become a free for all,” Cotton concludes.

Subscribe to our newsletter

Related content

WEBINAR

Recorded Webinar: Navigating a Complex World: Best Data Practices in Sanctions Screening

As rising geopolitical uncertainty prompts an intensification in the complexity and volume of global economic and financial sanctions, banks and financial institutions are faced with a daunting set of new compliance challenges. The risk of inadvertently engaging with sanctioned securities has never been higher and the penalties for doing so are harsh. Traditional sanctions screening...

BLOG

New Bloomberg US BDC Index Offers Insight into Private Credit

Bloomberg has launched a new index that brightens the light that is bringing transparency to often opaque private markets, this time with a focus on one of the sector’s more specialised corners. The New York-based data behemoth’s US BDC Aggregate Eligible Index (Ticker: BDCUSAGG) gives investors a unique view into how bonds issued by the...

EVENT

Eagle Alpha Alternative Data Conference, London, hosted by A-Team Group

Now in its 8th year, the Eagle Alpha Alternative Data Conference managed by A-Team Group, is the premier content forum and networking event for investment firms and hedge funds.

GUIDE

Entity Data Management Handbook – Fourth Edition

Welcome to the fourth edition of A-Team Group’s Entity Data Management Handbook sponsored by entity data specialist Bureau van Dijk, a Moody’s Analytics company. As entity data takes a central role in business strategies dedicated to making the customer experience markedly better, this handbook delves into the detail of everything you need to do to...