Comparing BET, CBET, and Copulas for Cash Flow Collateralized Debt Obligations
Date Issued
2009
Date
2009
Author(s)
Chen, Yu-Jen
Abstract
Since Collateralized Debt Obligations (CDOs) was invented in 1980s, there were many models developed in order to decide its tranche rating. The main objective of this paper is to find out if there are any rating differences between Moody’s Binomial Expansion Technique (BET) and Copulas adopted by S&P and Fitch.his paper begins with a brief introduction of how CDOs market was developed and advantages of CDOs. We describe the basic structure of CDOs including participants, classification, and waterfall. We also introduce the rating procedure of BET, CBET (Correlated Binomial Expansion Technique), and Copulas.ased on our study, Copulas tend to give higher expected loss to higher-grade tranches than BET and CBET, which means the default correlation plays a more important role in copulas than in BET and CBET. Besides, When default probability goes up, there would be a bigger impact on the credit rating given by BET and CBET than Copulas. This phenomenon shows that their sensitivities to default probability change are higher.
Subjects
CDO
BET
CBET
Copula
CBDD
Type
thesis
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