Examining the Validity of Credit Ratings Assigned to Credit Derivatives

Chih-Wei Lee, Cheng-Kun Kuo

ABSTRACT

This paper examines the validity of ratings assigned by rating agencies on structured products: ABS and ABS CDO. The rating agencies have been criticized for assigning AAA ratings to the structured products created from mortgages. The ratings might give a false sense of confidence to investors with which a vast market was created and then collapsed. Using a new loss function to compute the attachment points, we show that the previously considered reasonable ratings may need more scrutiny.

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