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The Crux of the Matter: Ratings and Credit Risk Valuation at the heart of the Structured Finance Crisis

Author

Listed:
  • Michel Aglietta
  • Ludovic Moreau
  • Adrian Roche

Abstract

The 2007/2008 global credit crisis was born out of opaque securitization transactions. Introducing structured products risk estimation techniques shows how the most basic investment analysis could not be done without detailed and updated knowledge on the assets of the pool. Access to such details was crucial for investors to perform an autonomous valuation, the lack of which led to a pervading acceptance of ratings at face value. The crisis brought numerous delusions to naïve users of these privately issued opinions. Coming back to the central role that investor played during the previous speculative episode and introducing a theoretical discussion on the dynamics of market finance, it is shown that trusting market discipline and due diligence was bound to end up being misguiding. Given that unprecedented rating volatility brought a share of the blame game to rating firms, strategies that would aim at securing an informed use of ratings are finally outlined.

Suggested Citation

  • Michel Aglietta & Ludovic Moreau & Adrian Roche, 2009. "The Crux of the Matter: Ratings and Credit Risk Valuation at the heart of the Structured Finance Crisis," EconomiX Working Papers 2009-3, University of Paris Nanterre, EconomiX.
    • Handle: RePEc:drm:wpaper:2009-3
    as

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    File URL: http://economix.fr/pdf/dt/2009/WP_EcoX_2009-03.pdf
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    References listed on IDEAS

    as
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    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    financial crisis; credit risk; rating agencies;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G29 - Financial Economics - - Financial Institutions and Services - - - Other

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