Vivian van Breemen

33 2.3.1 Empirical Model Wr a et i ni ngvseasst si gi gant ee dt hbeydCeRg Ar esei nt ot hwehpi crhi cEi nUg aonf dC LUOS amt at rhkeetti mi nev eosf tiosrssu raenlcyeo. nTot heex acmr eidniet ti shsi us ,a wn cee l oi no kt haets et h tewi om pmaacrt koe ft st hues icnrge doi rt dri antai nr yg loefa Cs tL Os qs uoanr etsh e( Of Lu Sn)d irnegg rceosssti oant ai nn aS leycstiiso, nw2h.i2c ,hwi se caolns os i setxeanmt iwn iet hi nHvee settoarl .r(e2l i0a1n6c )e. oBna soet dh eornf oa cutrolri st ebr ae yt uornedr ec rvei edwi t ratings that are specific to the CLO market (i.e., security design factors). We are primarily interested in the following for each market: (1) the size of the credit rvaatl iuneg ocfotehf ef i ccireendti tc or anttirnogl l ceodeffof irc ti ei mn te aasnmd ei sassuuerre df i xbeyd t ehfef eacdt sj u, s( 2t e) dt h e e x p l a n a t o r y R², and (3) the si ne cduertiet rymd iensiinggn tfha ec tporrisc et haatt i isns vuees. tToor sa ct ah ki eevien tt ho i as ,c wc oeupnet rbf oe yr mo nsde tvheer aclr reedgi rt ersast ii on ng ss that are generally based on the following model: Spreadijt = β0 + β1 Credit Ratingijt + β2 Tranche Countijt + β3 Capital Allocationijt + β4 Log Tranche Sizeijt + β5 Log Transaction Valueijt + β 6 Rating Discrepancyijt + Issuer and Market Controlsijt + ε ijt The data vary by year (t), deal (i) and security (j). We control for security-design characteristics, issuer-fixed effects and time-fixed effects. The specification used is an OLS regression with primary issuance spread as the dependent variable, Credit Rating as the independent variable and the other variables shown in thheet emr oogdeenl eai tbyo v ei n a socuorn t er os tl i vmaar ti ai obnl e, s .wBee c auus se e tah eheert reor ro st ke er md ass thi ac ivtey -scyosnt es ims taetni ct covariance matrix as suggested by White (1980). Due to the possibility of issuer- as tnadn dtai mr de -efri xr oe rds eofff ec oc tesf,f i cwi ehni ct hs , wweo ut hl de nl er audn tohuera nOaLlSy s irse st ruel tast i nt og euancdhesraems tpi ml eaat es panel data. We achieve this by including the issuance-year effects and we doubleChapter 2 - How much do Investors Rely on Credit Ratings

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