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Rating model arbitrage in CDO markets: An empirical analysis

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  • Morkötter, Stefan
  • Westerfeld, Simone

Abstract

We analyze whether information asymmetry between issuers and investors leads to rating model arbitrage in Collateralized Debt Obligation markets. Rating model arbitrage is defined as the issuer's deliberate capitalization of information asymmetry at the investor's cost on the basis of different rating processes. Using data from CDO transactions grouped by both rating agencies and underlying rating methodologies, we test for homogeneity of characteristic transaction features within the group and heterogeneity between the different groups. We find that the hypothesis stating non-existence of rating model arbitrage on the basis of information asymmetry does not hold as individual patterns of transaction characteristics within each group could be identified.

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  • Morkötter, Stefan & Westerfeld, Simone, 2009. "Rating model arbitrage in CDO markets: An empirical analysis," International Review of Financial Analysis, Elsevier, vol. 18(1-2), pages 21-33, March.
    • Handle: RePEc:eee:finana:v:18:y:2009:i:1-2:p:21-33
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    References listed on IDEAS

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    Cited by:

    1. Duan, Jin-Chuan & Van Laere, Elisabeth, 2012. "A public good approach to credit ratings – From concept to reality," Journal of Banking & Finance, Elsevier, vol. 36(12), pages 3239-3247.
    2. Lawrence J. White, 2013. "Credit Rating Agencies: An Overview," Annual Review of Financial Economics, Annual Reviews, vol. 5(1), pages 93-122, November.
    3. Lawrence J. White, 2010. "Markets: The Credit Rating Agencies," Journal of Economic Perspectives, American Economic Association, vol. 24(2), pages 211-226, Spring.

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