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Credit Risk Frontiers: Subprime Crisis, Pricing and Hedging, CVA, MBS, Ratings, and Liquidity
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Credit Risk Frontiers: Subprime Crisis, Pricing and Hedging, CVA, MBS, Ratings, and Liquidity

by Tomasz R. Bielecki, Damiano Brigo, Frédéric Patras
February 2011
Intermediate to advanced content levelIntermediate to advanced
768 pages
22h 39m
English
Bloomberg Press
Content preview from Credit Risk Frontiers: Subprime Crisis, Pricing and Hedging, CVA, MBS, Ratings, and Liquidity

Chapter 20

Stressing Rating Criteria Allowing for Default Clustering: The CPDO Case

Roberto Torresetti

Quaestio Capital Management, Milano

Andrea Pallavicini

Banca Leonardo, Financial Engineering

After a brief review of the literature on rating arbitrage for corporate and structured finance, we introduce the standard criteria adopted by rating agencies to assess the riskiness of constant proportion debt obligations (CPDOs). Then, we propose a new rating model in order to incorporate a more realistic loss distribution showing a multimodal shape, which, in turn, is linked to default possibilities for clusters (possibly sectors) of names in the economy. In this framework, we show that the riskiness of CPDOs is substantially increased, leading to ...

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Publisher Resources

ISBN: 9781118003831Purchase book