Risk Analysis of Collateralized Debt Obligations

Operations Research, Vol. 59, No. 1, pp. 32-49, 2011

37 Pages Posted: 12 Feb 2009 Last revised: 15 Jun 2016

See all articles by Kay Giesecke

Kay Giesecke

Stanford University - Management Science & Engineering

Baeho Kim

Korea University Business School (KUBS)

Date Written: June 17, 2009

Abstract

Collateralized debt obligations, which are are securities with payoffs that are tied to the cash flows in a portfolio of defaultable assets such as corporate bonds, play a significant role in the financial crisis that has spread throughout the world. Insufficient capital provisioning due to flawed and overly optimistic risk assessments is at the center of the problem. This paper develops stochastic methods to measure the risk of positions in collateralized debt obligations and related instruments tied to an underlying portfolio of defaultable assets. It proposes an adaptive point process model of portfolio default timing, a maximum likelihood method for estimating point process models that is based on an acceptance/rejection re-sampling scheme, and statistical tests for model validation. To illustrate these tools, they are used to estimate the distribution of the profit or loss generated by positions in multiple tranches of a collateralized debt obligation that references the CDX High Yield portfolio, and the risk capital required to support these positions.

Keywords: Correlated default risk, collateralized debt obligation, portfolio credit derivative, actual measure, point process, intensity, re-sampling, thinning, acceptance/rejection sampling, exact simulation

Suggested Citation

Giesecke, Kay and Kim, Baeho, Risk Analysis of Collateralized Debt Obligations (June 17, 2009). Operations Research, Vol. 59, No. 1, pp. 32-49, 2011. Available at SSRN: https://ssrn.com/abstract=1341747 or http://dx.doi.org/10.2139/ssrn.1341747

Kay Giesecke (Contact Author)

Stanford University - Management Science & Engineering ( email )

473 Via Ortega
Stanford, CA 94305-9025
United States
(650) 723 9265 (Phone)
(650) 723 1614 (Fax)

HOME PAGE: http://www.stanford.edu/~giesecke/

Baeho Kim

Korea University Business School (KUBS) ( email )

Anam-dong, Sungbuk-Gu
Korea University Business School
Seoul, 136-701
82-2-3290-2626 (Phone)
82-2-922-7220 (Fax)

HOME PAGE: http://biz.korea.ac.kr/~baehokim

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