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    Aakash Khandelwal
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    This paper examines the criteria used by credit rating agencies to rate structured products like mortgage-backed securities. The authors note that some investors use credit ratings to value these products, so the criteria need to be arbitrage-free. However, the criteria used by Standard & Poor's and Fitch do not satisfy this condition and could have misled investors during the subprime mortgage crisis by overrating securities backed by subprime mortgages.

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    This paper examines the criteria used by credit rating agencies to rate structured products like mortgage-backed securities. The authors note that some investors use credit ratings to value these products, so the criteria need to be arbitrage-free. However, the criteria used by Standard & Poor's and Fitch do not satisfy this condition and could have misled investors during the subprime mortgage crisis by overrating securities backed by subprime mortgages.

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    © All Rights Reserved
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    12 views1 page

    Ratings Criteria

    Uploaded by

    Aakash Khandelwal
    This paper examines the criteria used by credit rating agencies to rate structured products like mortgage-backed securities. The authors note that some investors use credit ratings to value these products, so the criteria need to be arbitrage-free. However, the criteria used by Standard & Poor's and Fitch do not satisfy this condition and could have misled investors during the subprime mortgage crisis by overrating securities backed by subprime mortgages.

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    RATINGS ARBITRAGE AND STRUCTURED PRODUCTS John Hull and Alan White Joseph L.

    Rotman School of Management University of Toronto hull@rotman.utoronto.ca awhite@rotman.utoronto.ca

    This article has now been published. See: Journal of Derivatives, Vol.20, No.1, Fall 2012, pp80-86

    ABSTRACT This paper examines the criteria used by credit rating agencies when they rate structured products. We assume that some investors use credit ratings as a basis for valuing products. This leads to a necessary condition for a credit ratings criterion to be arbitrage-free. We find that the criterion used by S&P and Fitch does not satisfy the condition and explain that this criterion could have misled investors when subprime mortgages were being securitized.

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