Do asset backed securities ratings matter on average?

• We test whether ratings do matter to the returns on the CABs index.
• We undertake both bivariate and multivariate analyses.
• We equally analyse other economic factors that impact on the index.
• We find that on their own, ratings of assets backed securities do matter.
• However, economic factors tend to overshadow the impact ratings.

This paper assesses the impact of asset backed ratings on the Merrill Lynch US Asset Backed Securities and Commercial Mortgage Backed Securities Index (CABs index) over a period January 1998 through to February 2010. In particular, we examine the relationship between ratings changes of the asset backed securities and the CABS index return. We further investigate how macroeconomic variables affect the relation between change in ratings and the CABS index return. We find that on their own, ratings of assets backed securities do matter to the CABS index return. However, controlling for economic factors appears to reduce the impact of the ratings changes on the CABS index return.