Cdo Bond Rating Model

In the past two years after the outbreak of the subprime debt crisis,no country in the world escapes to be involved in it.In developed countries such as the European countries and North America,their financial systems are severely impacted,banks face failures,and the financial markets suffer insufficient liquidity.Owing to the economic downturn of major consuming countries,an obvious slowdown in economic growth has been witnessed in emerging countries like China and India,All the world have paid a heavy price for this financial crisis.From the reflective perspective of the subprime Debt crisis,high risky credit derivatives such as Collateralized Debt Obligations(CDO) are considered to the culprit in the crisis.However,it seemed incredible that such kind of high risky credit derivatives won high credit rating without exception when they were issued.Therefore,it becomes particularly important to make a systematic and in-depth study on the CDO rating procedures and methodology.This paper firstly analyses the CDO rating procedures in detail and deconstructs the specific CDO rating models of the three major rating agencies,thus deducing the CDO rating of "backtrack" pattern and the inherent model risk in CDO rating.In addition,based on the assumption that the split rating is mainly caused by the rating shopping,this paper provides an empirical analysis of the relationship between the CDO rating split and the rating migration and demonstrates that the rating split CDO greatly increased the possibility of rating downgrade,and unlike the general corporate bonds,the rating grade of the CDO tranches cannot fully reflect their internal risk:the yield deviates from the risk in a certain extent,i.e.high-level CDO bonds do not necessarily represent low risk of default.This paper is composed of five chapters:the 1st and 2nd chapters are the introduction of CDO and the theoretical review of CDO rating methods.In chapter 3,we focus on the analysis of the CDO rating procedures and specific methods used by the three main rating agencies,such as S＆P,Moody's and Fitch.Beginning with fully understanding the process of the CDO rating,we make an in-depth study on the rating procedures and models,and dig out the model risk in rating process.After carefully tracing the specific rating procedures, we come to the conclusion that the initial spilt rating mainly results from the rating shopping. Based on this assumption,chapter 4 focuses on the empirical test about the relation between the initial split rating and the rating change.In chapter 5,the conclusion of the whole paper some discussion and suggestion raised by the paper are given.