Sense and Sensitivity: An Input Space Odyssey for ABS Ratings
36 Pages Posted: 13 Dec 2012
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
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