Ratings Arbitrage and Structured Products

by John Hull of the University of Toronto, and
Alan White of the University of Toronto

June 2010

Abstract: This paper studies the criteria used by rating agencies when they rate structured products. We assume that some investors assign a value to a product that is monotonic in the credit rating. This leads to a necessary condition for there to be no arbitrage. The criterion used by S&P and Fitch does not satisfy the condition while that used by Moody's does.

JEL Classification: G10.

Keywords: securitization, ratings, structured products, no-arbitrage.

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