Sense and Sensitivity: An Input Space Odyssey for Asset-Backed Security Ratings

Francesca Di Girolamo, Henrik Jonsson, Francesca Campolongo, Wim Schoutens


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.

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International Journal of Financial Research
ISSN 1923-4023(Print)ISSN 1923-4031(Online)


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