Sense and Sensitivity: An Input Space Odyssey for ABS Ratings

36 Pages Posted: 13 Dec 2012

See all articles by Francesca Di Girolamo

Francesca Di Girolamo

Joint Research Centre, Italy

Henrik Jonsson

European Commission - Joint Research Centre

Francesca Campolongo

Europoean Commission - Joint Reserach Centre; Joint Research Center of the European Commission

Wim Schoutens

KU Leuven - Department of Mathematics

Date Written: December 11, 2012

Abstract

The rating of asset backed securities is partly based on a quantitative model for the defaults and prepayments of the assets in the pool. This quantitative approach contains a number of assumptions and estimations of input variables whose values are affected by uncertainty. The uncertainty in these variables propagates through the model and produces uncertainty in the ratings.

The objectives of this paper are two fold. Firstly, we advocate the use of uncertainty and sensitivity analysis techniques to enhance the understanding of the variability of the ratings due to the uncertainty in the inputs used in the model. Secondly, we propose a novel rating approach called global rating, that takes this uncertainty in the output into account when assigning ratings to tranches.

Keywords: G21, G13, C15, C00

JEL Classification: Structured Finance, Asset-Backed Securities, Rating, Sensitivity Analysis, Default Models

Suggested Citation

Di Girolamo, Francesca and Jonsson, Henrik and Campolongo, Francesca and Schoutens, Wim, Sense and Sensitivity: An Input Space Odyssey for ABS Ratings (December 11, 2012). Available at SSRN: https://ssrn.com/abstract=2187843 or http://dx.doi.org/10.2139/ssrn.2187843

Francesca Di Girolamo (Contact Author)

Joint Research Centre, Italy ( email )

Via E. Fermi 1
I-21020 Ispra (VA)
United States

Henrik Jonsson

European Commission - Joint Research Centre ( email )

Via E. Fermi 2749
Ispra (VA), 21027
Italy

Francesca Campolongo

Europoean Commission - Joint Reserach Centre ( email )

Rue de la Loi 200
Brussels, B-1049
Belgium

Joint Research Center of the European Commission ( email )

Via E. Fermi 2749
1049
Belgium

Wim Schoutens

KU Leuven - Department of Mathematics ( email )

Celestijnenlaan 200 B
Leuven, B-3001
Belgium

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