Rating Performance and Agency Incentives of Structured Finance Transactions
41 Pages Posted: 5 Aug 2009 Last revised: 31 Jan 2010
Date Written: November 22, 2009
The mismatch between credit ratings of structured finance transactions and their true risks has been a source of the Global Financial Crisis which manifested in criticism of models and techniques applied by credit rating agencies (CRA). This paper provides an empirical study which assesses the historical performance of credit ratings for structured finance transactions and finds that CRAs do not include all factors explaining securitization impairment risk. In addition, CRA ratings for selected asset categories underestimate risk in origination years when the fee revenue is high.
Keywords: asset-backed security, collateralized debt obligation, economic downturn, fee revenue, forecasting, home equity loans, impairment rate, mortgage-backed security, structured finance rating, Global Financial crisis
JEL Classification: G20, G28, C51
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