 Credit rating impact on CDO evaluationDaniel Rösch and Harald Scheule Global Finance Journal, 2009, vol. 19, issue 3, 235-251 Abstract: One of the most significant developments in international credit markets in recent years has been the trade in Collateralized Debt Obligations (CDO), which has enabled financial institutions to repackage the credit risk of an asset portfolio into tranches to be transferred to investors. The present paper evaluates the credit risk of such a portfolio and the related tranches by applying two prominent prototypes for credit ratings, namely the point-in-time and through-the-cycle approach. The central parameters default probability and correlation are forecast for multiple years and related forecasting errors are included. The article's main findings are that banks which transfer debt tranches but retain an equity part and apply a through-the-cycle rating approach may be exposed to higher insolvency risk. Firstly, the credit risk retained may be underestimated resulting in an inadequate capital allocation. Secondly, the credit risk transferred may be overestimated resulting in additional risk-based transfer costs. Keywords: Business; cycle; Collateralized; Debt; Obligation; Correlation; Credit; risk; Default; probability; Point-in-time; Portfolio; Through-the-cycle (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:eee:glofin:v:19:y:2009:i:3:p:235-251 Access Statistics for this article Global Finance Journal is currently edited by Manuchehr Shahrokhi More articles in Global Finance Journal from Elsevier |
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