The PEAL Method: a mathematical framework to streamline securitization structuring

ArXiv ID: 2404.05372 “View on arXiv”

Authors: Unknown

Abstract

Securitization is a financial process where the cash flows of income-generating assets are sold to institutional investors as securities, liquidating illiquid assets. This practice presents persistent challenges due to the absence of a comprehensive mathematical framework for structuring asset-backed securities. While existing literature provides technical analysis of credit risk modeling, there remains a need for a definitive framework detailing the allocation of the inbound cash flows to the outbound positions. To fill this gap, we introduce the PEAL Method: a 10-step mathematical framework to streamline the securitization structuring across all time periods. The PEAL Method offers a rigorous and versatile approach, allowing practitioners to structure various types of securitizations, including those with complex vertical positions. By employing standardized equations, it facilitates the delineation of payment priorities and enhances risk characterization for both the asset and the liability sides throughout the securitization life cycle. In addition to its technical contributions, the PEAL Method aims to elevate industry standards by addressing longstanding challenges in securitization. By providing detailed information to investors and enabling transparent risk profile comparisons, it promotes market transparency and enables stronger regulatory oversight. In summary, the PEAL Method represents a significant advancement in securitization literature, offering a standardized framework for precision and efficiency in structuring transactions. Its adoption has the potential to drive innovation and enhance risk management practices in the securitization market.

Keywords: Securitization, Asset-Backed Securities (ABS), Cash Flow Waterfall, Risk Allocation, PEAL Method, Fixed Income

Complexity vs Empirical Score

• Math Complexity: 7.5/10
• Empirical Rigor: 2.0/10
• Quadrant: Lab Rats
• Why: The paper introduces a rigorous 10-step mathematical framework with numerous equations, matrices, and formal definitions for cash flow allocation and risk tranching. However, it lacks any implementation details, backtests, or real-world data validation, focusing instead on theoretical structuring.

  flowchart TD
    A["Research Goal: Develop a comprehensive mathematical framework<br>to streamline securitization structuring"] --> B["Methodology: The PEAL Method<br>10-Step Mathematical Framework"]
    B --> C["Inputs: Asset Cash Flows & Liability Terms"]
    C --> D["Computation: Standardized Equations<br>for Cash Flow Allocation & Waterfall"]
    D --> E["Output: Structured Asset-Backed Securities"]
    E --> F{"Key Outcomes"}
    F --> F1["Precise Risk Allocation"]
    F --> F2["Enhanced Market Transparency"]
    F --> F3["Streamlined Structuring Process"]