Analysis And Valuation Of Subordinate Structures In Collateralized Baskets Of Defaultable Obligations

Topics:
Commercial Lending
Tags:
Analysis,
Strategy,
Security,
Risk Management,
Operational Planning,
Obligation,
Management,
Intensity,
Financial Services,
Financial Planning,
...
Source:
The Trustees of Princeton University

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Overview: This paper analyzes subordinate tranches in collateralized debt obligations and proposes a model for approximating the value of a basket of default-correlated debt assets. The model is calibrated to a pure intensity-based simulation of correlated defaults and represents an alternative computation method. Timing of individual obligor defaults are driven by intensity processes and collateral value is modeled with a jump-diffusion process where the number of jumps corresponds to the total number of defaults in the asset pool. This approach allows decomposition of subordinate obligations in terms of a collection of simpler securities and yields useful risk management information. Examples are given on how to price and structure subordinated securities using this approach.

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Format: HTML | Size: 348KB | Date: Mar 2003 | Pages: 22

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