Constant proportion debt obligations / Michael B. Gordy in Management science, Vol. 58 N° 3 (Mars 2012)  

Public ISBD [article]  inManagement science > Vol. 58 N° 3 (Mars 2012) . - pp. 476-492 Titre : Constant proportion debt obligations : A postmortem analysis of rating models Type de document : texte imprimé Auteurs : Michael B. Gordy, Auteur ; Søren Willemann, Auteur Année de publication : 2012 Article en page(s) : pp. 476-492 Note générale : Management Langues : Anglais (eng) Mots-clés : Credit risk Securitization Structured credit Rating agencies Stochastic volatility Résumé : In its complexity and its vulnerability to market volatility, the constant proportion debt obligation (CPDO) might be viewed as the poster child for the excesses of financial engineering in the credit market. This paper examines the CPDO as a case study in model risk in the rating of complex structured products. We demonstrate that the models used by Standard and Poor's (S&P) and Moody's fail in-sample specification tests even during the precrisis period and in particular understate the kurtosis of spread changes. Because stochastic volatility is the most natural explanation for the excess kurtosis, we estimate an extended version of the S&P model with stochastic volatility and find that the volatility-of-volatility is large and significant. An implication is that agency model-implied probabilities of attaining high spread levels were biased downward, which in turn biased the rating upward. We conclude with larger lessons for the rating of complex products and for modeling credit risk in general. DEWEY : 658 ISSN : 0025-1909 En ligne : http://mansci.journal.informs.org/content/58/3.toc [article] Constant proportion debt obligations : A postmortem analysis of rating models [texte imprimé] / Michael B. Gordy, Auteur ; Søren Willemann, Auteur . - 2012 . - pp. 476-492. Management Langues : Anglais (eng) in Management science > Vol. 58 N° 3 (Mars 2012) . - pp. 476-492 Mots-clés : Credit risk Securitization Structured credit Rating agencies Stochastic volatility Résumé : In its complexity and its vulnerability to market volatility, the constant proportion debt obligation (CPDO) might be viewed as the poster child for the excesses of financial engineering in the credit market. This paper examines the CPDO as a case study in model risk in the rating of complex structured products. We demonstrate that the models used by Standard and Poor's (S&P) and Moody's fail in-sample specification tests even during the precrisis period and in particular understate the kurtosis of spread changes. Because stochastic volatility is the most natural explanation for the excess kurtosis, we estimate an extended version of the S&P model with stochastic volatility and find that the volatility-of-volatility is large and significant. An implication is that agency model-implied probabilities of attaining high spread levels were biased downward, which in turn biased the rating upward. We conclude with larger lessons for the rating of complex products and for modeling credit risk in general. DEWEY : 658 ISSN : 0025-1909 En ligne : http://mansci.journal.informs.org/content/58/3.toc

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