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Keywords = contingent convertible bond (CoCo)

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26 pages, 460 KB  
Article
Credit Rating and Pricing: Poles Apart
by Andreas Blöchlinger
J. Risk Financial Manag. 2018, 11(2), 27; https://doi.org/10.3390/jrfm11020027 - 23 May 2018
Cited by 1 | Viewed by 5260
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 [...] Read more.
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. Full article
(This article belongs to the Special Issue Risk and Financial Instability)
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