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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. "The future of securitisation: how to align incentives," BIS Quarterly Review, Bank for International Settlements, September.
  2. Ingo Fender & Janet Mitchell, 2009. "Incentives and tranche retention in securitisation : a screening model," Working Paper Research 177, National Bank of Belgium.
  3. Lützenkirchen, Kristina & Rösch, Daniel & Scheule, Harald, 2013. "Ratings based capital adequacy for securitizations," Journal of Banking & Finance, Elsevier, vol. 37(12), pages 5236-5247.
  4. Siegert, Caspar, 2014. "Optimal Opacity on Financial Markets," Discussion Papers in Economics 20937, University of Munich, Department of Economics.
  5. Claudio Borio & Mathias Drehmann & Kostas Tsatsaronis, 2012. "Stress-testing macro stress testing: does it live up to expectations?," BIS Working Papers 369, Bank for International Settlements.
  6. Arndt Claußen & Sebastian Löhr & Daniel Rösch, 2014. "An analytical approach for systematic risk sensitivity of structured finance products," Review of Derivatives Research, Springer, vol. 17(1), pages 1-37, April.
  7. Claudio Borio & Mathias Drehmann, 2009. "Towards an Operational Framework for Financial Stability: "Fuzzy" Measurement and its Consequences," Working Papers Central Bank of Chile 544, Central Bank of Chile.
  8. 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, vol. 6(3), pages 14-19, October.
  9. Claudio Borio & Bent Vale & Goeth von Peter, 2010. "Resolving the financial crisis: are we heeding the lessons from the Nordics?," BIS Working Papers 311, Bank for International Settlements.
  10. Scholz, Julia, 2011. "Manager- und transaktionsspezifische Determinanten der Performance von Arbitrage CLOs," Discussion Papers in Business Administration 12144, University of Munich, Munich School of Management.
  11. Wojtowicz, Marcin, 2014. "CDOs and the financial crisis: Credit ratings and fair premia," Journal of Banking & Finance, Elsevier, vol. 39(C), pages 1-13.
  12. Frank Packer & Nikola Tarashev, 2011. "Rating methodologies for banks," BIS Quarterly Review, Bank for International Settlements, June.

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