Structured Finance and Credit Ratings: A Continuous-Time Moral Hazard Model

• Main Authors: Lee, Ping-Heng, 李秉恆
• Other Authors: Sheu, Yuan-Chung
• Format: Others
• Language: en_US
• Published: 2011
• Online Access: http://ndltd.ncl.edu.tw/handle/84427072466048741607

碩士 === 國立交通大學 === 應用數學系數學建模與科學計算碩士班 === 100 === We analyze the impact of structured finance on underwriting practices in a continuous-time moral hazard model. We show that increased securitization may decrease underwriting standards, and hence lead to a decline in credit quality. Many investors base their investment decisions on credit ratings and are attracted to highly-rated securities. Nevertheless, the failure of ratings to reflect the systematic risk characteristics of securities creates arbitrage opportunities from pooling and tranching. This consequently encourages structured finance activities and adversely affects screening incentives of underwriters.