Rating Performance and Agency Incentives of Structured Finance Transactions

42 Pages Posted: 24 Jul 2010 Last revised: 20 Nov 2010

Daniel Roesch

University of Regensburg

Harald (Harry) Scheule

University of Technology Sydney (UTS) - School of Finance and Economics; Financial Research Network; Centre for International Finance and Regulation (CIFR)

Multiple version iconThere are 2 versions of this paper

Date Written: 2010

Abstract

The mismatch between credit ratings o fstructured 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, Global Financial Crisis, Home Equity Loans, Impairment Rate, Mortgage-backed Security, Structured Finance Rating

JEL Classification: G20, G28, C51

Suggested Citation

Roesch, Daniel and Scheule, Harald (Harry), Rating Performance and Agency Incentives of Structured Finance Transactions (2010). Paolo Baffi Centre Research Paper No. 2010-78. Available at SSRN: https://ssrn.com/abstract=1646906 or http://dx.doi.org/10.2139/ssrn.1646906

Daniel Roesch (Contact Author)

University of Regensburg ( email )

Department of Statistics and Risk Management
Faculty of Economics
Regensburg, 93040
Germany

HOME PAGE: http://www-risk.ur.de/

Harald Scheule

University of Technology Sydney (UTS) - School of Finance and Economics ( email )

P.O. Box 123
Sydney
Australia

Financial Research Network ( email )

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

Centre for International Finance and Regulation (CIFR) ( email )

Level 7, UNSW CBD Campus
1 O'Connell Street
Sydney, NSW 2000
Australia

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