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Credit fundamentals, ratings and value-at-risk: CDOs versus corporate exposures

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  • Ingo Fender
  • Nikola Tarashev
  • Haibin Zhu

Abstract

This article compares the linkages between credit fundamentals, ratings and value-at-risk measures for CDO tranches with those for corporate bond exposures. A sensitivity analysis incorporating market information and rating migrations data reveals that the behaviour of CDO tranche ratings can differ markedly from that of corporate ratings. In addition, tranching is found to have an important impact on the probability of large losses. This highlights how investors who narrowly focus on ratings and draw direct parallels with corporate exposures can seriously misjudge the value-at-risk of CDOs.

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Bibliographic Info

Article provided by Bank for International Settlements in its journal BIS Quarterly Review.

Volume (Year): (2008)
Issue (Month): (March)
Pages:

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Handle: RePEc:bis:bisqtr:0803i

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Cited by:
  1. Ingo Fender & Janet Mitchell, 2009. "Incentives and tranche retention in securitisation: a screening model," BIS Working Papers 289, Bank for International Settlements.
  2. Claudio Borio & Bent Vale & Goetz von Peter, 2010. "Resolving the financial crisis: are we heeding the lessons from the Nordics?," Working Paper, Norges Bank 2010/17, Norges Bank.
  3. Bernd Rudolph & Julia Scholz, 2008. "Driving Factors of the Subprime Crisis and Some Reform Proposals," CESifo DICE Report, Ifo Institute for Economic Research at the University of Munich, Ifo Institute for Economic Research at the University of Munich, vol. 6(3), pages 14-19, October.
  4. Borio, Claudio & Drehmann, Mathias & Tsatsaronis, Kostas, 2014. "Stress-testing macro stress testing: Does it live up to expectations?," Journal of Financial Stability, Elsevier, Elsevier, vol. 12(C), pages 3-15.
  5. Siegert, Caspar, 2014. "Optimal Opacity on Financial Markets," Discussion Papers in Economics, University of Munich, Department of Economics 20937, University of Munich, Department of Economics.
  6. Lützenkirchen, Kristina & Rösch, Daniel & Scheule, Harald, 2013. "Ratings based capital adequacy for securitizations," Journal of Banking & Finance, Elsevier, Elsevier, vol. 37(12), pages 5236-5247.
  7. Scholz, Julia, 2011. "Manager- und transaktionsspezifische Determinanten der Performance von Arbitrage CLOs," Discussion Papers in Business Administration, University of Munich, Munich School of Management 12144, University of Munich, Munich School of Management.
  8. Claudio Borio & Claudio Mathias Drehmann, 2009. "Towards an operational framework for financial stability: "fuzzy" measurement and its consequences," BIS Working Papers 284, Bank for International Settlements.
  9. Wojtowicz, Marcin, 2014. "CDOs and the financial crisis: Credit ratings and fair premia," Journal of Banking & Finance, Elsevier, Elsevier, vol. 39(C), pages 1-13.
  10. Ingo Fender & Janet Mitchell, 2009. "The future of securitisation: how to align incentives," BIS Quarterly Review, Bank for International Settlements, Bank for International Settlements, September.
  11. Frank Packer & Nikola Tarashev, 2011. "Rating methodologies for banks," BIS Quarterly Review, Bank for International Settlements, Bank for International Settlements, June.
  12. Arndt Claußen & Sebastian Löhr & Daniel Rösch, 2014. "An analytical approach for systematic risk sensitivity of structured finance products," Review of Derivatives Research, Springer, Springer, vol. 17(1), pages 1-37, April.

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