TY - GEN
T1 - Buffered Probability of Exceedance (bPOE) Ratings for Synthetic Instruments
AU - Pertaia, Giorgi
AU - Uryasev, Stan
N1 - Publisher Copyright:
© 2019, Springer Nature Switzerland AG.
PY - 2019
Y1 - 2019
N2 - Credit Rating is an important characteristic of company in financial market. Investors determine the appropriate yields (required return) for the assets such as Bonds and CDO tranches, based on credit rating. Current methodology for measuring credit rating for synthetic instruments is based on probability of exceedance concept. The probability of exceedance has several drawbacks as a measure of risk. The most important is that it does not measure the magnitude of loss in the event of default. Therefore, financial instruments with very different exposures in the event of default may have the same rating. This paper illustrates, how the new measure called Buffered Probability of Exceedance (bPOE) can be used to calculate the credit ratings. The bPOE has exceptional qualitative and quantitative characteristics, compared to the probability of exceedance. bPOE is sensitive to the thickness of the tail of the loss distribution. Therefore, the exposure in the event of default impacts the ratings based on bPOE.
AB - Credit Rating is an important characteristic of company in financial market. Investors determine the appropriate yields (required return) for the assets such as Bonds and CDO tranches, based on credit rating. Current methodology for measuring credit rating for synthetic instruments is based on probability of exceedance concept. The probability of exceedance has several drawbacks as a measure of risk. The most important is that it does not measure the magnitude of loss in the event of default. Therefore, financial instruments with very different exposures in the event of default may have the same rating. This paper illustrates, how the new measure called Buffered Probability of Exceedance (bPOE) can be used to calculate the credit ratings. The bPOE has exceptional qualitative and quantitative characteristics, compared to the probability of exceedance. bPOE is sensitive to the thickness of the tail of the loss distribution. Therefore, the exposure in the event of default impacts the ratings based on bPOE.
KW - bPOE
KW - Buffered probability of exceedance
KW - CD
KW - Collateralized debt obligation
KW - Conditional Value-at-Risk
KW - CVaR
KW - POE
KW - Probability of exceedance
KW - Ratings
UR - https://www.scopus.com/pages/publications/85081116774
U2 - 10.1007/978-3-030-04726-9_21
DO - 10.1007/978-3-030-04726-9_21
M3 - Conference contribution
AN - SCOPUS:85081116774
SN - 9783030047252
T3 - Springer Proceedings in Business and Economics
SP - 211
EP - 216
BT - Advances in Service Science - Proceedings of the 2018 INFORMS International Conference on Service Science
A2 - Yang, Hui
A2 - Qiu, Robin
PB - Springer Science and Business Media B.V.
T2 - INFORMS International Conference on Service Science, ICSS 2018
Y2 - 3 November 2018 through 3 November 2018
ER -