Examining the Validity of Credit Ratings Assigned to Credit Derivatives
18 Pages Posted: 16 Sep 2011
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: Suggested Citation
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