Investors were surprised during the Global Financial Crisis that mortgage securiti-zations were exposed to larger default rates than corporate bonds given the same credit rating. This paper presents a parsimonious model attributing deviations of default rates from expected default probabilities implied by credit ratings to sys-tematic risk. Conditions, under which the systematic risk of securitized tranches of pools is higher than that of single name debt instruments with the same rating are identi ed. An extensive empirical study analyzes a unique and comprehensive data set, which includes ratings, yield spreads, defaults and control variables for securitizations and corporate bonds. The analysis nds evidence that nancial in-struments may be exposed to di erent levels of systematic risk given the same rating. Therefore, credit ratings do not provide comprehensive information on the degree of systematic risk. An analysis of yield spreads at origination nds empirical evidence that fixed income investors (contrary to credit rating agencies) include systematic risk in the pricing of nancial instruments.
JEL classi cation: G20; G28; C51
Keywords: Asset-backed Security; Collateralized Debt Obligation; Corporate Bond; Default; Economic Downturn; Financial Crisis; Home Equity Loan Security; Impairment; Residential Mortgage-backed Security; Rating; Securitization; Systematic Risk; Yield Spreads.
