| In July 2007, the U.S. Subprime Mortgage Crisis triggered the financial crisis quickly and spread to the world so far. In the current financial crisis, including the conduction and amplification of the financial crisis, collateralized debt obligations (CDO) is at the core of the crisis. Therefore, this is leading financial theorists and market practitioners of new'types of structured financial instruments extensive attention. This article aims to give Collateralized Debt Obligations (CDO) of asset structure, risk-sharing and so on, and analyze the sensitivity of all tranches to the basic parameters. Combined with the several typical CDO products behind the financial crisis in 2007, this paper analyzes the real cause of the financial crisis. At last, I discuss the issues of our financial innovation that should pay attention to and give some policy recommendations.Asset securitization technology enables assets to be transferred to various risks facing become possible. This technology will separate credit risk of assets from the risks that assets bear. Special Purpose Vehicle (SPV) makes them into CDO, and issue CDO to investors in the capital markets after the tranches are rated. Senior tranche and Mezzanine tranche can be published in the capital market because of their low default risk. Junior tranche have the higher risk of default, and even though its earnings have a higher premium, but also have difficult to marketing. Moreover, the regulator made it clear that banks can not invest in speculative-grade financial instruments (below BBB-level), so those who received low-grade have more difficult to finance in the capital markets. CDO solve this problem, SPV collect a large number of the same class (for example, BBB grade) bonds to form a pool of assets, and give a cash-flow claims to generate high-grade tranche, even AAA grade.We discuss the design principle of CDO, as well as the sensitivity of all tranches to the basic parameters. We can know that CDO is an advanced structured financial product that can provide the market investors with access to high-risk credit markets. Its design characteristics require rating agencies assess default possibilities of underlying assets more accurately, but also require rating agencies to accurately estimate the default correlation of underlying assets. There are three aspects of the main factors affect rating changes of the CDO tranches:default possibilities of the corporate debt, expected default loss and default correlation. Firstly, this paper analyzes the principle of CDO, and introduces the current rating model. Secondly, we simulate expected default loss of CDO tranches and sensitivity of all tranches to the basic parameters. Given a pool of assets, default rate, the correlation coefficient, default restore rate, a cash-flow claims, following Fitch's rating criteria, we change the basic parameters, and we can clearly see that the changes of the expected loss of CDO tranches and the rating changes, and then see a very clear difference in risk characteristics CDO tranches. As previously mentioned, the individual asset default risk of the underlying asset pool is further broken down, through the distribution of the form of cash flow CDO re-allocate the risk of the asset pool. Based on single-factor Gaussian copula model, this paper divides the risk of the underlying asset into systematic risk and non-systematic risk, and receives the joint distribution of losses by using Gaussian copula function, we can prove a cash flow claim of CDO, in fact, re-allocate systematic risk and non-systematic risk of the underlying assets, that is the senior tranche focus the entire asset pool of the systematic risk, junior tranche focus the non-systematic risk, the current ratting result given to senior tranche by rating agencies will underestimate the systemic risk rating.By adding a parameters to determine the system risk in the Gaussian copula function, from a long-term, medium-and short-term perspective, we can draw a conclusion:for those shorter-term CDO products (such as basic assets are short-term commercial paper), exposure to the systematic risk is low, and these products are more suitable to the market promotion; for the others, typically such as mortgage securities (MBS), the senior and mezzanine tranche explore more systemic risk, the pricing for them is too low. The pro-cyclical features of rating agencies will underestimate the systematic risk, which are the true causes of the outbreak of the financial crisis.The estimated default correlation which used in rating model give a direct impact on the accuracy of ratings, therefore the analysis of the underlying asset pool directly determine the accuracy of estimates of default correlation. Background of the financial crisis, underlying asset pool of some typical CDO products are discussed in this paper, we found that the underlying asset is the subject tended to focus on a particular industry or a certain number of trades. The rapid development of real estate over the past decade, banks have accumulated a large number of mortgage loans. Through asset securitization techniques, this type of products based on a large number of mortgage loan are published. Because this type of loan the credit risk explored to real-estate industry is too large, a larger proportion of these CDO actually facing the risk of falling home prices, and did not meet CDO structure on the basis of asset diversification requirements. Domestic CDO product-the National Development Bank in 2005 Kaiyuan series of products-43.6% of the underlying asset pool focus on electricity and heat production and supply; The report of BIS (2008a) showed that the residential mortgage-backed securities accounted for 75% in CDO tranche (including subprime mortgage-backed securities accounted for 50%), he residential mortgage-backed securities accounted for 89% in mezzanine tranche (including subprime mortgage-backed securities accounted for 77%). One hand, rating agencies may underestimate the possibility of the fall in real-estate price; on the other hand, industry concentration in the ratings model is also a direct impact on default correlation estimate (underestimate).We can not help but ask:rating agencies should be able to expect errors in the rating process, but why credit rating agencies continue to maintain their rating processes? This paper argues that rating agencies have sufficient motivation to underestimate this risk. Firstly, in an economic cycle, pro-cyclical features can better fit the reality, when a specific industry develop rapidly, downgrading the estimated default rate can be realistic, but this will accumulate a great deal of risk; Secondly, the rating agency business competition; Finally, agencies over-confident that their own rating models.Based on the above ideas, this paper is as follows:Chapter 1 is introduction. This chapter will discuss the topic of the article; describe the background, research objectives, significance and thesis research methods and structural arrangements of this article.Chapter 2 is a literature review to introduce the foreign CDO pricing model and the parameter sensitivity analysis and I will point out that the shortcomings of existing research and put forward perspectives of this research. Chapter 3 is CDO structural analysis. I simulate expected default loss of CDO tranches and sensitivity of all tranches to the basic parameters.Chapter 4 is CDO practices. First, in the form of case analysis in the CDO market, and its designed to be the difference, and analyze CDO in the financial crisis, the true role of rating agencies for the benefit of the last specified in the financial crisis has not shirk its responsibility.Chapter 5 is conclusions and policy recommendations. In this chapter to make a simple summary of the main conclusions of this paper, and set out that our financial innovation should pay attention to the early stage of preparation, also points out that the CDO product design, rating and supervision in China should be taken note of.In contrast, the current studies about the theory of the CDO give more emphasis on theory than risk characteristics of CDO tranches, especially in connection with issuance of the CDO market, product analysis. Therefore, the perspective of this paper is the simulation of the risk distribution of CDO tranches, and gives the mathematical proof, and in the form of empirical researches product problems has issued. These aspects have some reference in the present literature abroad, but in comparison these seemed not go far enough. This article argues that the CDO products are fragile based on their specific structures and this was not the true cause to this financial crisis, and the design error of CDO by SPV and rating models and motivation of rating agencies lead to difference to the real CDO structure. This boils down to the following innovations.·I simulate CDO tranches'sensitivity to basic parameters, and analyze the risk structure of all tranches, propose that pool of the debt maturity will affect the exposure of CDO tranches to system risk.·Evidence in the form of mining assets, CDO pools detailed product information, clear that the European and American markets with the theoretical design of CDO products have greater error.·I discuss the true causes of financial crisis, and point out the responsibility of rating agencies and regulatory agencies in the financial crisis. |
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