Open AccessSense and Sensitivity: An Input Space Odyssey for Asset-Backed Security Ratings
Author(s) -
Francesca Di Girolamo,
Henrik Jönsson,
Francesca Campolongo,
Wim Schoutens
Publication year - 2012
Publication title -
international journal of financial research
Language(s) - English
Resource type - Journals
eISSN - 1923-4031
pISSN - 1923-4023
DOI - 10.5430/ijfr.v3n4p46
Subject(s) - sensitivity (control systems) , asset (computer security) , econometrics , default , computer science , space (punctuation) , uncertainty analysis , sensitivity analysis , actuarial science , economics , finance , simulation , computer security , electronic engineering , engineering , operating system
The rating of asset-backed securities is partly based on quantitative models for the defaults and prepayments of the assets in the pool. This quantitative approach contains a number of assumptions and estimations of input variables whose values are affected by uncertainty. The uncertainty in these variables propagates through the model and produces uncertainty in the ratings. The objectives of this paper are twofold. Firstly, we advocate the use of uncertainty and sensitivity analysis techniques to enhance the understanding of the variability of the ratings due to the uncertainty in the inputs used in the model. Secondly, we propose a novel rating approach called global rating, that takes this uncertainty in the output into account when assigning ratings to tranches