The Impact of the Financial Crisis on the Role of Credit Rating as a Determinant of Asset-Backed Securities' Launch Spreads PDF Download
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Author: Riccardo Magno
Publisher:
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Category :
Languages : en
Pages :
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I investigate the evolution of spread determinants on structured finance issues over a twelve years period, before and during the financial crisis, with a specific focus on the impact of the securitization markets collapse on the role of Credit Rating as a determinant of asset-backed securities launch spread. Through an empirical study on a sample of securitization issues, I find that Credit Rating influence on spread has been subject to changes on specific aspects since the beginning of the financial crisis. I find evidences that on average, during the financial crisis, higher Credit Ratings have a less intense impact in lowering asset-backed securities' launch spread than in pre-crisis times, while negative ratings' worsening effect on spread is somehow amplified. Furthermore, I find a few evidences that during the financial crisis investors may also rely on other public information about liquidity and market characteristics and as well about systematic risk aspects in assessing a given issue. Such information is usually included in Credit Rating to assess structured finance issues, but has revealed to be less significant in pre-crisis time. Thus the influence of Credit Rating on spread, and as well that of other relevant spread determinants, may be subject to changes in structure and dimension as a result of the financial crisis. I also theoretically discuss and suggest the likely possibility that such results are linked to changes in markets and investors' expectations about Credit Rating and Rating Agencies' reliability and trustworthiness.
Author: Riccardo Magno
Publisher:
ISBN:
Category :
Languages : en
Pages :
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Book Description
I investigate the evolution of spread determinants on structured finance issues over a twelve years period, before and during the financial crisis, with a specific focus on the impact of the securitization markets collapse on the role of Credit Rating as a determinant of asset-backed securities launch spread. Through an empirical study on a sample of securitization issues, I find that Credit Rating influence on spread has been subject to changes on specific aspects since the beginning of the financial crisis. I find evidences that on average, during the financial crisis, higher Credit Ratings have a less intense impact in lowering asset-backed securities' launch spread than in pre-crisis times, while negative ratings' worsening effect on spread is somehow amplified. Furthermore, I find a few evidences that during the financial crisis investors may also rely on other public information about liquidity and market characteristics and as well about systematic risk aspects in assessing a given issue. Such information is usually included in Credit Rating to assess structured finance issues, but has revealed to be less significant in pre-crisis time. Thus the influence of Credit Rating on spread, and as well that of other relevant spread determinants, may be subject to changes in structure and dimension as a result of the financial crisis. I also theoretically discuss and suggest the likely possibility that such results are linked to changes in markets and investors' expectations about Credit Rating and Rating Agencies' reliability and trustworthiness.
Author: John Ammer
Publisher:
ISBN:
Category : Credit ratings
Languages : en
Pages : 0
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"We assess the impact of credit ratings on the pricing of structured financial products, using a sample of more than 1300 changes in Moodys or Standard and Poors (S & P) ratings of U.S. asset-backed securities (ABS). We find that rating downgrades tend to be accompanied by negative returns and widening spreads, with the average effects stronger than those that have been reported in prior research on corporate and sovereign bond ratings. A portion of the negative implications of ABS downgrades are anticipated by price movements ahead of the rating action, although to a lesser degree than has been found for bond ratings. Accordingly, ABS market participants appear to rely somewhat more on rating agencies as a source of negative news about credit risk. Nevertheless, because ABS rating downgrades are relatively rare events, their effects account for only a small fraction of the variance of returns. In contrast to our results on downgrades, market reactions to ABS rating upgrades are virtually zero, on average. Together, the results imply even greater asymmetry in the value-relevance of ABS rating changes than has been found in event studies of changes in bond ratings"--Federal Reserve Board web site
Author: Malte Henrik Klein
Publisher: GRIN Verlag
ISBN: 3668171254
Category : Business & Economics
Languages : en
Pages : 51
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Book Description
Bachelor Thesis from the year 2010 in the subject Economics - International Economic Relations, grade: 2.0, University of Osnabrück, language: English, abstract: To understand the roots of the capital markets and the rating agencies I want to start this Bachelor Thesis with a historical development. With introduction of the Issuer Pays Model and the proclamation of so called NRSROs there is the starting point for a long time discussion within the credit rating industry. Then I want to introduce the case of Enron, a former energy conglomerate which has been wrongly rated by the rating agencies. I want to investigate if there are any parallels to the crisis of 2007. I also want to understand and show the reasons and the structure of the crisis of 2007. So I will introduce the Subprime market and structured finance, as these topics were probably the triggers for the crisis. The main part of my thesis is to find an explanation for the performance of the credit rating agencies. I use a theoretical model which stresses the complexity of assets. The model says that the more complex an asset is, the harder it is to rate for the agencies. In opposite to that I want to compare the results of the theoretical model with an empirical study. I want to investigate if the theoretical model gets the same result as the empirical approach or if there are huge differences. At last I want to introduce some solution proposals by myself and think about further approaches.
Author: United States. Congress. Senate. Committee on Homeland Security and Governmental Affairs. Permanent Subcommittee on Investigations
Publisher:
ISBN:
Category : Bank failures
Languages : en
Pages : 1228
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Author: United States. Congress. Senate. Committee on Banking, Housing, and Urban Affairs
Publisher:
ISBN:
Category : Business & Economics
Languages : en
Pages : 152
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Author: Timothy J. Sinclair
Publisher: Cornell University Press
ISBN: 1501760254
Category : Business & Economics
Languages : en
Pages : 114
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Book Description
To the Brink of Destruction exposes how America's rating agencies helped generate the global financial crisis of 2007 and beyond, surviving and thriving in the aftermath. Despite widespread scrutiny, rating agencies continued to operate on the same business model and wield extraordinary power, exerting extensive influence over public policy. Timothy J. Sinclair brings the shadowy corners of this story to life by examining congressional testimony, showing how the wheels of accountability turned—and ultimately failed—during the crisis. He asks how and why the agencies risked their lucrative franchise by aligning so closely with a process of financial innovation that came undone during the crisis. What he finds is that key institutions, including the agencies, changed from being judges to being advocates years before the crisis, eliminating a vital safety valve meant to hinder financial excess. Sinclair's well-researched investigation offers a clear, accessible explanation of structured finance and how it works. To the Brink of Destruction avoids tired accusations, instead providing novel insight into the role rating agencies played in the worst crisis of modern global capitalism.
Author:
Publisher:
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Category :
Languages : en
Pages :
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Asset-backed securitization (ABS) may contribute to generating instability in financial markets both through an 'inside effect' in the banking system - facilitating progressive deterioration of bank assets' quality - and through an 'outside effect' - favoring credit risk transfer from balance sheets of banks acting as originators to investors in asset-backed securities (ABS). The rating assigned to ABS has the function of indicating to the market the credit risk borne by investors. This depends on the quality of assets and of guarantees lent by originators and by any third-party guarantor, as well as on the trend of macroeconomic determinants which may compromise the capacity of principal debtors to honor their debts.The underlying hypothesis on which this work is based is that rating models do not correctly embody the impact of macroeconomic variables on debtors' solvency, determining a lag in downgrading. In particular, it is considered that any variations in interest rates and GDP have an impact on ABS performances, but that such an impact is not picked up in a timely fashion by rating models. Essentially, in pre-crisis periods, when interest rate increases as well as decreases are recorded in growth rates of GDP, rating assessments fail to register risk increases in ABS securities, only proceeding to downgrade later, when variations in macroeconomic variables have generated negative effects on the flow of ABS funds.We verify this hypothesis specifically with reference to ABS transactions active during the recent financial and economic crisis. We then proceed to test information on ABS rating, assessing it in relation to the timing of downgrading on a sample of transactions which took place between 2000 and 2009. The conclusions reached confirm the theoretical hypothesis, demonstrating that, in the pre-crisis period, when macroeconomic variables suggested the need for a downgrading judgement, agencies delayed downmarking, making the announcement only at a later stage, after the crisis had taken place and the transaction criticalities were already displayed. The chapter is related to the literature analyzing relations between the financial crisis and asset- backed securitization, bringing an innovative contribution to empirical and theoretical studies, aimed at defining an interpretational model for relations between ABS and financial crises.
Author: Francesco Sangiorgi
Publisher:
ISBN: 9781680833805
Category : Business & Economics
Languages : en
Pages : 0
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Book Description
The Economics of Credit Rating Agencies explores the economic and regulatory issues and frictions associated with credit rating agencies in the aftermath of the financial crisis. While ratings and other public signals are important, they can discourage independent due diligence and be a source of systemic risk. The authors highlight the diverse underlying views towards these competing approaches to reducing systemic risk and discuss the subtle contrasts between credit rating agencies and other types of due diligence providers, such as auditors, analysts and proxy-voting advisors. After an introduction, Section 2 provides a broad discussion of ratings in the regulatory framework, as well as how ratings potentially crowd out private information production and the risks associated with overreliance on ratings in market pricing. Section 3 contrasts credit rating agencies with alternative gatekeepers, such as auditors, analysts and proxy-voting advisers. Section 4 describes the difficulty of selling information and the underpinnings of the payment model for various financial information intermediaries under alternative assumptions. Section 5 discusses of rating agency analyst conflict of interest. An important aspect of credit ratings is the feedback effect that arises when a firm's behavior responds to the change in the cost of funding that is influenced by the rating. Feedback effects arise because of contractual triggers, but also through coordination and learning channels. Section 6 discusses these channels and especially the learning channel. Section 7 discusses selection issues including rating shopping and the contrast between solicited and unsolicited credit ratings. Section 8 contrasts ratings across products, including sovereign debt, and rating agencies. The nature of competition and the role of entry and reputation in the credit rating agency space are explored in Section 9. Section 10 examines why ratings matter, as well as techniques for identifying the real effects of ratings. The authors provide concluding observations and takeaways about rating agencies that emerged as a byproduct of the financial crisis in Section 11.
Author: Alina Andrei
Publisher: GRIN Verlag
ISBN: 3656431752
Category : Business & Economics
Languages : de
Pages : 86
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Book Description
Masterarbeit aus dem Jahr 2012 im Fachbereich BWL - Bank, Börse, Versicherung, Fachhochschule des bfi Wien GmbH, Veranstaltung: Banking and Finance, Sprache: Deutsch, Abstract: The purpose of this paper is to measure the correlation between the foreign longterm issuer credit ratings and both, credit spreads and ASW and to assess the role that the Rating Agencies play on the capital markets. Ratings reflect the financial strength and credit-worthiness of the issuer as assessed by the external rating agency. Spreads indicate the market’s expectations in connection to the riskiness of the investment. Hence high spreads compensate investors for the higher risk taken. The result of the analysis is that there indeed exist correlations between foreign long-term issuer credit ratings and both, credit spreads and ASW. A high spread is strongly correlated to a low credit rating. However, even if the relationship exists, it is not possible to draw clear patterns of the market behavior. In some of the analyzed cases, market movements took place before a rating change, which indicates that both, the market and rating agencies considered the same information. In other cases, the market was influenced by the rating change. And sometimes the market reacted different to the rating agencies decisions and expectations. Overall the market reacts differently fast and not homogenous to the “fundamental” information it has. This makes it impossible to clearly state the extent to which ratings influence spreads. The results are not clear enough to indicate a more precise answer or to fully understand the market behavior. The market is a highly volatile environment in which it is impossible to draw predictable behavior patterns in relation purely to the credit rating. This inconsistency in reaction is partially conflicting the theory of the strong-form EMH, as the market reacts to the asymmetric level of information available or prices in other factors not covered in this paper.
Author: Mr.Stijn Claessens
Publisher: International Monetary Fund
ISBN: 1475561008
Category : Business & Economics
Languages : en
Pages : 66
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Book Description
This paper reviews the literature on financial crises focusing on three specific aspects. First, what are the main factors explaining financial crises? Since many theories on the sources of financial crises highlight the importance of sharp fluctuations in asset and credit markets, the paper briefly reviews theoretical and empirical studies on developments in these markets around financial crises. Second, what are the major types of financial crises? The paper focuses on the main theoretical and empirical explanations of four types of financial crises—currency crises, sudden stops, debt crises, and banking crises—and presents a survey of the literature that attempts to identify these episodes. Third, what are the real and financial sector implications of crises? The paper briefly reviews the short- and medium-run implications of crises for the real economy and financial sector. It concludes with a summary of the main lessons from the literature and future research directions.
