An Empirical Analysis of the Pricing of Collateralized Debt Obligations
We use the information in collateralized debt obligations (CDO) prices to study market expectations about how corporate defaults cluster. A three-factor portfolio credit model explains virtually all of the time-series and cross-sectional variation in an extensive data set of CDX index tranche prices. Tranches are priced as if losses of 0.4%, 6%, and 35% of the portfolio occur with expected frequencies of 1.2, 41.5, and 763 years, respectively. On average, 65% of the CDX spread is due to firm-specific default risk, 27% to clustered industry or sector default risk, and 8% to catastrophic or systemic default risk. Copyright 2008 by The American Finance Association.
Year of publication: |
2008
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Authors: | LONGSTAFF, FRANCIS A. ; RAJAN, ARVIND |
Published in: |
Journal of Finance. - American Finance Association - AFA, ISSN 1540-6261. - Vol. 63.2008, 2, p. 529-563
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Publisher: |
American Finance Association - AFA |
Saved in:
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