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Ratings of structured products and issuers' commitments

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  • Veiga, Carlos
  • Wystup, Uwe
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    Abstract

    This paper analyzes the evolution of the structured products market focusing on the tools available for private investors, on which they rely for the selection process. The selection process is extremely difficult because there is a myriad of products, because of the dynamic nature of the market and market participants' actions, and because of the complexity of many of the products. We consider the existing types of tools, in particular the rating schemes that have been proposed by industry participants to provide guidance to the investor. We propose a set of properties that a rating scheme should show and check whether the existing schemes carry these properties. Our findings suggest that the existing rating schemes do not carry the desired properties. Furthermore, for the purpose of solving a highly indefinite selection process, an effective rating scheme may not exist. In light of this, we propose the introduction of a new quantity, the floor, that has a legal and financial meaning, on which issuers can also compete in addition to price and spread. Its acceptance and use would also yield standardization towards investors' interests by excluding some pricing practices and severely limiting others. Even though very little research has been produced in this area, we believe this to be a topic of high importance in establishing guidelines for healthy industry development and regulation that upholds investors' interests. --

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    Bibliographic Info

    Paper provided by Frankfurt School of Finance and Management, Centre for Practical Quantitative Finance (CPQF) in its series CPQF Working Paper Series with number 26.

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    Date of creation: 2010
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    Handle: RePEc:zbw:cpqfwp:26

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    Keywords: structured products; rating schemes; certificates; warrants; floor; market making;

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    References

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    1. Hankir, Yassin & Rauch, Christian & Umber, Marc P., 2009. "It's the market power, stupid! Stock return patterns in international bank M&A," Frankfurt School - Working Paper Series 129, Frankfurt School of Finance and Management.
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    3. Bannier, Christina E., 2007. "Heterogeneous multiple bank financing: does it reduce inefficient credit-renegotation incidences?," Frankfurt School - Working Paper Series 83, Frankfurt School of Finance and Management.
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    6. Bannier, Christina E. & Metz, Sabrina, 2010. "Are SMEs large firms en miniature? Evidence from a growth analysis," Frankfurt School - Working Paper Series 142, Frankfurt School of Finance and Management.
    7. Bannier, Christina E. & Feess, Eberhard, 2010. "When high-powered incentive contracts reduce performance: choking under pressure as a screening device," Frankfurt School - Working Paper Series 135, Frankfurt School of Finance and Management.
    8. Roßbach, Peter, 2009. "Die Rolle des Internets als Informationsbeschaffungsmedium in Banken," Frankfurt School - Working Paper Series 120, Frankfurt School of Finance and Management.
    9. Bannier, Christina E. & Hirsch, Christian W., 2010. "The economic function of credit rating agencies - What does the watchlist tell us?," Journal of Banking & Finance, Elsevier, vol. 34(12), pages 3037-3049, December.
    10. Libman, Alexander, 2010. "Constitutions, regulations, and taxes: Contradictions of different aspects of decentralization," Frankfurt School - Working Paper Series 138, Frankfurt School of Finance and Management.
    11. Christina E. Bannier & Patrick Behr & Andre Güttler, 2010. "Rating opaque borrowers: why are unsolicited ratings lower?," Review of Finance, European Finance Association, vol. 14(2), pages 263-294.
    12. Wollersheim, Jutta & Barthel, Erich, 2008. "Kulturunterschiede bei Mergers & Acquisitions: Entwicklung eines Konzeptes zur Durchführung einer Cultural Due Diligence," Frankfurt School - Working Paper Series 94, Frankfurt School of Finance and Management.
    13. Bannier, Christina E. & Hänsel, Dennis N., 2007. "Determinants of banks' engagement in loan securitization," Frankfurt School - Working Paper Series 85, Frankfurt School of Finance and Management.
    14. Hirsch, Christian & Bannier, Christina E., 2007. "The economics of rating watchlists: Evidence from rating changes," CFS Working Paper Series 2008/02, Center for Financial Studies (CFS).
    15. Ansgar Belke & Thorsten Polleit, 2005. "(How) Do Stock Market Returns React to Monetary Policy? - An ARDL Cointegration Analysis for Germany," Diskussionspapiere aus dem Institut für Volkswirtschaftslehre der Universität Hohenheim 253/2005, Department of Economics, University of Hohenheim, Germany.
    16. Herrmann-Pillath, Carsten & Libman, Alexander & Xiaofan, Yu, 2010. "State and market integration in China: A spatial econometrics approach to 'local protectionism'," Frankfurt School - Working Paper Series 137, Frankfurt School of Finance and Management.
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