Tuesday, April 21, 2020
In
the
paper,
Ruodu
and
his
co-authors
propose
a
theory
for
rating
financial
securities,
which
is
the
first
rigorous
treatment
of
the
question
of
what
is
an
economically
sensible
way
of
rating
financial
instruments
with
credit
risk,
such
as
defaultable
debts,
Collateralized
Debt
Obligations
(CDO),
and
Collateralized
Loan
Obligations
(CLO).
The
study
reveals
empirical
evidences
in
the
post-Dodd-Frank
period
(i.e.,
after
July
2010)
that
the
issuers
of
CDO/CLO
can
take
advantage
of
the
absence
of
an
important
theoretical
property,
called
self-consistency
in
the
paper.
With
several
theoretical
results,
the
co-authors
demonstrate
that
the
lack
of
such
a
property
may
lead
to
the
serious
issue
of
tranche
maximization
which
is
widely
seen
in
today's
CLO
market.
As
credit
rating
and
rating
agencies
play
a
crucial
part
for
the
security
of
the
modern
financial
system
and
the
economy,
flawed
rating
mechanisms
could
further
lead
to
adverse
financial
consequences
under
today's
extreme
financial
stress.
To view the paper, please visit Social Science Research Network (SSRN).
This paper was a joint work by: Nan Guo, Steven Kou, Bin Wang and Ruodu Wang