69 3.1 Introduction The structured finance securities market is frequently named by market observers as an important contributor to the depth and length of the Great Rd ee nc eusnsci ioant i otnhsa ta r es t tayrpt ei cda l lwy iet hv e nt hset r ognl ogbe ar l wfhi ne annrcei fael r rci rnigs i tso os pf e2c i0f i0c7s- e2g0m0 8e .n tTs hoef the structured finance market, such as collateralized loan obligations (CLOs) or m( CoRrAe s b) rtohaadt l yd ocmo lilna at et er atl hi zee dmda er kbet t ofbolri graat ti oi nngs s(uCcDhOsse) c. uTrhi tei ecsr ehdaivt er at ht ienrge faogreenac li seos been accused of playing a significant part in the crisis, by displaying behaviors that give rise to credit rating risk for investors: the risk that ratings do not fully or accurately reflect the actual credit risk of a security at issuance, by, for example, CRAs assign biased ratings to structured products. Such biased ratings may have caused investors to misprice these securities (see, e.g., He et al., 2012; Kraft, 2015). Dr aet si npgi tse, ti ht ei swgi de ensepr ar el layd ecxrpi tei cc ti semd tohf aCt L COLs O, as s wwiel ll l caosnot ifnCuRe Atso wpi ltahy r ea snp ei mc t ptoor Ct aLnOt rf uonl ed ii nn gt hv ee hci rcel edsi tf omr at rhkeest hs aodf otwh ebfauntkuirneg. Ts ehci tsoirs. Cdounes et oq uc eonnttliyn, ui te di s ui ms ep oo rf tCa nL Ot tshaast regulatory requirements regarding the use of credit ratings in the CLO market are improved to mitigate the concerns identified by the financial crisis. In designing these regulatory requirements, policy-makers so far have not dC iosnt isnegquuies nh teldy, tbheet wd ee efna c mt o ovr iee wo ro fl epsos l i cc oy -mmpal ke ex r ss tirsu tcht ua tr eadl l fsitnraunc ct ue r esde cfui nr iatni ecse. securities are equally complex. However, during the two decades in the run up to the global financial crisis, financial products such as CLOs became more complex, apsr ot hd eu catrsr, aiyn oc rf et ar as ne ds a. cFt iuornt hf ee ramt uor rees ,, pt hl aey i snegc au rriot yl e di ne st hi genr ilsi tke ar as st ue rs es meemnpt ho af ssiuzcehs that heightened complexity may cause investors to rely more strongly on credit ratings (Arora et al., 2011; Carlin et al., 2013). These observations led us to Chapter 3 - Security Design and Credit Rating Risk
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