Examining the Validity of Credit Ratings Assigned to Credit Derivatives

18 Pages Posted: 16 Sep 2011

See all articles by Arthur C. Lee

Arthur C. Lee

National Taipei College of Business

Cheng-Kun Kuo

National Taiwan University - College of Management

Date Written: September 15, 2011

Abstract

This paper examines the validity of ratings assigned by rating agencies on structured products: ABS and ABS CDO. The rating agencies have been criticized for assigning AAA ratings to the structured products created from mortgages. The ratings might give a false sense of confidence to investors with which a vast market was created and then collapsed. Using a new loss function to compute the attachment points, we show that the previously considered reasonable ratings may need more scrutiny.

Keywords: Rating agency, Asset-backed security (ABS), Collateral debt obligation (CDO), Loss function

JEL Classification: G12, G24

Suggested Citation

Lee, Chih-Wei and Kuo, Cheng-Kun, Examining the Validity of Credit Ratings Assigned to Credit Derivatives (September 15, 2011). Available at SSRN: https://ssrn.com/abstract=1927816 or http://dx.doi.org/10.2139/ssrn.1927816

Chih-Wei Lee (Contact Author)

National Taipei College of Business ( email )

Taipei
Taiwan

Cheng-Kun Kuo

National Taiwan University - College of Management ( email )

Department and Graduate Institute of Finance
College of Management
Taipei 106
Taiwan

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