Fitch Ratings will start rating collateralized debt obligations using correlation and simulation technology later this month. "This means we can get closer to real world events," explained Stefan Bund, managing director responsible for the new criteria in London. Fitch will start using the model, dubbed the Vector Model, on July 14.
The rating agency had previously used a scenario model to rate CDOs. This looked at around 80 possible outcomes, the new method will use a Monte Carlo technique to look at an infinite number, noted Bund. It has also calculated the correlation between 25 industries and will break that down to look at the correlation between different regions.
Bund said increasing sophistication of risk modeling prompted the change in methodology. "As the methodology in structuring CDOs evolves, so does the methodology in rating them," he added.
