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

Author

Listed:
  • 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.

Suggested Citation

  • Ingo Fender & Nikola Tarashev & Haibin Zhu, 2008. "Credit fundamentals, ratings and value-at-risk: CDOs versus corporate exposures," BIS Quarterly Review, Bank for International Settlements, March.
    • Handle: RePEc:bis:bisqtr:0803i
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    Citations

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    Cited by:

    1. Wojtowicz, Marcin, 2014. "CDOs and the financial crisis: Credit ratings and fair premia," Journal of Banking & Finance, Elsevier, vol. 39(C), pages 1-13.
    2. Bernd Rudolph & Julia Scholz, 2008. "Driving Factors of the Subprime Crisis and Some Reform Proposals," ifo DICE Report, ifo Institute - Leibniz Institute for Economic Research at the University of Munich, vol. 6(03), pages 14-19, October.
    3. Barbara Choroś-Tomczyk & Wolfgang Karl H�rdle & Ludger Overbeck, 2014. "Copula dynamics in CDOs," Quantitative Finance, Taylor & Francis Journals, vol. 14(9), pages 1573-1585, September.
    4. Király, Júlia & Nagy, Márton & Szabó E., Viktor, 2008. "Egy különleges eseménysorozat elemzése - a másodrendű jelzáloghitel-piaci válság és (hazai) következményei [Analysis of a special sequence of events - the crisis on the secondary mortgage market an," Közgazdasági Szemle (Economic Review - monthly of the Hungarian Academy of Sciences), Közgazdasági Szemle Alapítvány (Economic Review Foundation), vol. 0(7), pages 573-621.
    5. Ingo Fender & Janet Mitchell, 2009. "Incentives and tranche retention in securitisation: a screening model," BIS Working Papers 289, Bank for International Settlements.
    6. Dror Parnes, 2015. "Dynamic risk model for CMO with credit tranching," International Journal of Financial Engineering (IJFE), World Scientific Publishing Co. Pte. Ltd., vol. 2(04), pages 1-15, December.
    7. Claudio Borio, 2010. "Ten propositions about liquidity crises," CESifo Economic Studies, CESifo Group, vol. 56(1), pages 70-95, March.
    8. Adonis Antoniades & Nikola Tarashev, 2014. "Securitisations: tranching concentrates uncertainty," BIS Quarterly Review, Bank for International Settlements, December.
    9. Claudio Borio & Mathias Drehmann, 2011. "Toward an Operational Framework for Financial Stability: “Fuzzy” Measurement and Its Consequences," Central Banking, Analysis, and Economic Policies Book Series, in: Rodrigo Alfaro (ed.),Financial Stability, Monetary Policy, and Central Banking, edition 1, volume 15, chapter 4, pages 063-123, Central Bank of Chile.
    10. William R. White, 2014. "The Prudential Regulation of Financial Institutions: Why Regulatory Responses to the Crisis Might Not Prove Sufficient," OECD Economics Department Working Papers 1108, OECD Publishing.
    11. repec:ces:ifodic:v:6:y:2008:i:3:p:14567230 is not listed on IDEAS
    12. Borio, Claudio & Drehmann, Mathias & Tsatsaronis, Kostas, 2014. "Stress-testing macro stress testing: Does it live up to expectations?," Journal of Financial Stability, Elsevier, vol. 12(C), pages 3-15.
    13. PICIU, Gabriela Cornelia, 2013. "Internal Rating – An Active Instrument In The Management Of Banking Risks. Case Study Bcr," Studii Financiare (Financial Studies), Centre of Financial and Monetary Research "Victor Slavescu", vol. 17(2), pages 21-30.
    14. Siegert, Caspar, 2014. "Optimal Opacity on Financial Markets," Discussion Papers in Economics 20937, University of Munich, Department of Economics.
    15. Bernd Rudolph & Julia Scholz, 2008. "Driving Factors of the Subprime Crisis and Some Reform Proposals," ifo DICE Report, ifo Institute - Leibniz Institute for Economic Research at the University of Munich, vol. 6(3), pages 14-19, October.
    16. Scheicher, Martin, 2008. "How has CDO market pricing changed during the turmoil? Evidence from CDS index tranches," Working Paper Series 910, European Central Bank.
    17. 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.
    18. Lützenkirchen, Kristina & Rösch, Daniel & Scheule, Harald, 2013. "Ratings based capital adequacy for securitizations," Journal of Banking & Finance, Elsevier, vol. 37(12), pages 5236-5247.
    19. Claudio Borio & Bent Vale & Goetz von Peter, 2010. "Resolving the financial crisis: are we heeding the lessons from the Nordics?," Working Paper 2010/17, Norges Bank.
    20. 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.
    21. Ingo Fender & Janet Mitchell, 2009. "The future of securitisation: how to align incentives," BIS Quarterly Review, Bank for International Settlements, September.
    22. Frank Packer & Nikola Tarashev, 2011. "Rating methodologies for banks," BIS Quarterly Review, Bank for International Settlements, June.

    More about this item

    JEL classification:

    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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