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http://ssrn.com/abstract=1944094
 
 

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CDOs and the Financial Crisis: Credit Ratings and Fair Premia


Marcin Wojtowicz


VU University Amsterdam - Department of Finance and Financial Sector Management; Tinbergen Institute - Tinbergen Institute Amsterdam (TIA); Tinbergen Institute

April 28, 2011

Paris December 2011 Finance Meeting EUROFIDAI - AFFI

Abstract:     
We study risk and return characteristics of CDOs using the market standard models. We find that fair spreads on CDO tranches are much higher than fair spreads on similarly-rated corporate bonds. Our results imply that credit ratings are not sufficient for pricing, which is surprising given their central role in structured finance markets. This illustrates limitations of the rating methodologies that are solely based on real-world payoff prospects and do not incorporate risk premia. We also demonstrate that CDO tranches have large exposure to systematic risk and thus their ratings and prices are likely to decline substantially when credit conditions deteriorate.

Number of Pages in PDF File: 46

Keywords: Collateralized debt obligations, Credit ratings, Fair premia, Structured finance, Rating agencies

JEL Classification: C52, G01, G11

working papers series


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Date posted: October 14, 2011 ; Last revised: November 19, 2012

Suggested Citation

Wojtowicz, Marcin, CDOs and the Financial Crisis: Credit Ratings and Fair Premia (April 28, 2011). Paris December 2011 Finance Meeting EUROFIDAI - AFFI. Available at SSRN: http://ssrn.com/abstract=1944094 or http://dx.doi.org/10.2139/ssrn.1944094

Contact Information

Marcin Wojtowicz (Contact Author)
VU University Amsterdam - Department of Finance and Financial Sector Management ( email )
De Boelelaan 1105
NL-1081HV Amsterdam
Netherlands
+31 20 598 3828 (Phone)
Tinbergen Institute - Tinbergen Institute Amsterdam (TIA) ( email )
Gustav Mahlerplein 117
Amsterdam, 1082 MS
Netherlands
Tinbergen Institute ( email )
Burg. Oudlaan 50
Rotterdam, 3062 PA
Netherlands
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