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J. Risk Financial Manag. 2018, 11(2), 27; https://doi.org/10.3390/jrfm11020027

Credit Rating and Pricing: Poles Apart

1
Swisscanto Invest by Zürcher Kantonalbank, Hardstrasse 201, CH-8005 Zurich, Switzerland
2
University of Zurich, Rämistrasse 71, CH-8006 Zurich, Switzerland
Current address: Hardstrasse 201, CH-8005 Zurich, Switzerland
Received: 3 March 2018 / Revised: 3 May 2018 / Accepted: 12 May 2018 / Published: 23 May 2018
(This article belongs to the Special Issue Risk and Financial Instability)
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Abstract

Corporate credit ratings remove the information asymmetry between lenders and borrowers to find an equilibrium price. Structured finance ratings, however, are informationally insufficient because the systematic risk of equally rated assets can vary substantially. As I demonstrate in a Monte Carlo analysis, highly-rated structured finance bonds can exhibit far higher non-linear systematic risks than lowly-rated corporate bonds. I value credit instruments under a four-moment CAPM, between and within some markets there is no one-to-one relation between expected loss (rating) and credit spread (pricing). The linear CAPM beta is insufficient, buyers and sellers need also the same information on non-linear risk to have an equilibrium. View Full-Text
Keywords: asset backed security (ABS); contingent convertible bond (CoCo); standard risk aversion; capital asset pricing model (CAPM); UBS crisis asset backed security (ABS); contingent convertible bond (CoCo); standard risk aversion; capital asset pricing model (CAPM); UBS crisis
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Blöchlinger, A. Credit Rating and Pricing: Poles Apart. J. Risk Financial Manag. 2018, 11, 27.

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