@article {Hamilton40, author = {David T Hamilton and Yukyung Choi}, title = {Measuring the Credit Risk of Synthetic CDOs with CDS-Implied Ratings}, volume = {19}, number = {1}, pages = {40--54}, year = {2009}, doi = {10.3905/JFI.2009.19.1.040}, publisher = {Institutional Investor Journals Umbrella}, abstract = {Market price-based measures of credit risk have become commonplace in single-name risk management, but they are lacking for structured credit instruments such as CDOs. In this article, the authors demonstrate how CDS-implied ratings for corporate reference entities, together with an analytic portfolio risk model, can be used to derive CDS-implied tranche ratings for corporate synthetic CDOs (CSOs). It is an experiment in which one key variable is changed{\textemdash}the ratings of the portfolio of reference entities{\textemdash}while holding other data and model assumptions constant. The authors create two parallel rating histories for the CDO tranches, one using Moody{\textquoteright}s corporate ratings for the reference entities and one using CDS-implied ratings for the same entities, and measure and compare how the derived tranche ratings perform. They find that CDS-implied tranche ratings lead changes in Moody{\textquoteright}s ratings, are no more volatile than Moody{\textquoteright}s-based ratings, more accurately rank order default losses by rating, and exhibit higher loss prediction accuracy ratios for the riskiest tranches.TOPICS: CLOs, CDOs, and other structured credit, credit default swaps, information providers/credit ratings}, issn = {1059-8596}, URL = {https://jfi.pm-research.com/content/19/1/40}, eprint = {https://jfi.pm-research.com/content/19/1/40.full.pdf}, journal = {The Journal of Fixed Income} }