CDOs and systematic risk: Why bond ratings are inadequate

Arbeitspapier

This paper analyzes the risk properties of typical asset-backed securities (ABS), like CDOs or MBS, relying on a model with both macroeconomic and idiosyncratic components. The examined properties include expected loss, loss given default, and macro factor dependencies. Using a two-dimensional loss decomposition as a new metric, the risk properties of individual ABS tranches can directly be compared to those of corporate bonds, within and across rating classes. By applying Monte Carlo Simulation, we find that the risk properties of ABS differ significantly and systematically from those of straight bonds with the same rating. In particular, loss given default, the sensitivities to macroeconomic risk, and model risk differ greatly between instruments. Our findings have implications for understanding the credit crisis and for policy making. On an economic level, our analysis suggests a new explanation for the observed rating inflation in structured finance markets during the pre-crisis period 2004-2007. On a policy level, our findings call for a termination of the 'one-size-fits-all' approach to the rating methodology for fixed income instruments, requiring an own rating methodology for structured finance instruments.

Angaben zum Objekt

• Sprache: Englisch

Verweise und Beziehungen

• Erschienen in: Series: CFS Working Paper ; No. 2009/11

Klassifikation und Themen

• Klassifikation: Wirtschaft ; Banks; Depository Institutions; Micro Finance Institutions; Mortgages ; Financial Institutions and Services: Government Policy and Regulation
• Thema: Credit Risk ; Risk Transfer ; Systematic Risk ; Asset-backed security ; Securitization ; Kreditrisiko ; Kreditwürdigkeit ; Finanzmarktkrise ; Welt

Beteiligte, Orts- und Zeitangaben

• Ereignis: Geistige Schöpfung
• (wer): Krahnen, Jan Pieter ; Wilde, Christian
• Ereignis: Veröffentlichung
• (wer): Goethe University Frankfurt, Center for Financial Studies (CFS)
• (wo): Frankfurt a. M.
• (wann): 2009

Weitere Informationen

• Handle: http://hdl.handle.net/10419/43191
• URN: urn:nbn:de:hebis:30-67240
• Letzte Aktualisierung: 20.09.2024, 08:24 MESZ