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Abstract
Current rating agency practices do not appear to factor into the ratings of insured consumer asset-backed securities (ABS) the effects of correlation between an insurer default and a transaction default. As a result, the rating agencies assign lower ratings to insured bonds from consumer ABS transactions even when the performance of the underlying assets and the performance of the insurer may have a low correlated probability of default. In this article, the authors’ goal is to show the significant rating impact of correlation. They provide a detailed analysis and conclude that a significant rating benefit could be conferred by the proper inverse correlation structure.
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US and Overseas: +1 646-931-9045
UK: 0207 139 1600