Abstract
Pricing financial derivates is viewed as one of the problems causing the subprime storm. With the domino effect, the fallout from the subprime mortgage crisis has been spreading across the globe rapidly. It might be likely that the panic results from being misestimated the level of unexpected loss. In order to calibrate the level of such risk, this research simulates the house price and also the short rates. Furthermore, the next step is to estimate quarterly conditional probabilities of default and prepayment with the multinomial logit models introduced by Calhoun and Deng (2002). More importantly, the survival model is utilized to gen-erate the distribution of cumulated default rate to ensure the thickness of each tranche within the ABS. Based upon the estimated the distribution of the thickness for the ABS tranche, this study redirects the cash flow generating by the FRM to investigate the extent to which the degree of the burden risk with corresponding rate of return. Adopting the Sharpe measure to standardize between the internal rate of return and exploring risk. Eventually, the result of Sharpe measure of each tranche does not appear horizon con-dition. As soon as the thickness of each tranche is decided, the shape of Sharpe meas-ure of each tranche is certain. We observe an abnormal condition between return and risk of ABS.