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Conference of 2007
Finance Center Münster
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In this paper we analyze the arbitrage gains from marketing structured debt securities at yields that reflect the credit ratings of ratings agencies when the ratings depend on either the probabilities of default or the expected default losses of the securities issued. We consider the gains both from choosing the collateral against which the debt securities are written, and from dividing the debt into tranches with different priority. We derive general results and characterize the gains for examples that are based on the CAPM and the Merton (1974) debt pricing model.
Abstract
Tranching and Rating
Hein, Julia; Brennan, Michael J.; Poon, Ser-HuangIn this paper we analyze the arbitrage gains from marketing structured debt securities at yields that reflect the credit ratings of ratings agencies when the ratings depend on either the probabilities of default or the expected default losses of the securities issued. We consider the gains both from choosing the collateral against which the debt securities are written, and from dividing the debt into tranches with different priority. We derive general results and characterize the gains for examples that are based on the CAPM and the Merton (1974) debt pricing model.