Buffered Probability of Exceedance (bPOE) Ratings for Synthetic Instruments

Giorgi Pertaia () and Stan Uryasev ()
Additional contact information
Giorgi Pertaia: University of Florida
Stan Uryasev: University of Florida

A chapter in Advances in Service Science, 2019, pp 211-216 from Springer

Abstract: Abstract Credit Rating is an important characteristic of company in financial market. Investors determine the appropriate yields (required return) for the assets such as Bonds and CDO tranches, based on credit rating. Current methodology for measuring credit rating for synthetic instruments is based on probability of exceedance concept. The probability of exceedance has several drawbacks as a measure of risk. The most important is that it does not measure the magnitude of loss in the event of default. Therefore, financial instruments with very different exposures in the event of default may have the same rating. This paper illustrates, how the new measure called Buffered Probability of Exceedance (bPOE) can be used to calculate the credit ratings. The bPOE has exceptional qualitative and quantitative characteristics, compared to the probability of exceedance. bPOE is sensitive to the thickness of the tail of the loss distribution. Therefore, the exposure in the event of default impacts the ratings based on bPOE.

Keywords: Buffered probability of exceedance; bPOE; Probability of exceedance; POE; Conditional Value-at-Risk; CVaR; Ratings; Collateralized debt obligation; CD (search for similar items in EconPapers)
Date: 2019
References: Add references at CitEc
Citations:

There are no downloads for this item, see the EconPapers FAQ for hints about obtaining it.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:spr:prbchp:978-3-030-04726-9_21

Ordering information: This item can be ordered from
http://www.springer.com/9783030047269

DOI: 10.1007/978-3-030-04726-9_21

Access Statistics for this chapter

More chapters in Springer Proceedings in Business and Economics from Springer
Bibliographic data for series maintained by Sonal Shukla () and Springer Nature Abstracting and Indexing ().