Optimal Tranching in CDO-Transactions

35 Pages Posted: 16 Feb 2009

See all articles by Thomas Weber

Thomas Weber

University of Konstanz - Department of Economics

Guenter Franke

University of Konstanz - Department of Economics

Date Written: February 13, 2009

Abstract

This paper empirically investigates the tranching of European securitizations of corporate loans and bonds. Loans or bonds are pooled together in a portfolio which then is sliced into a First Loss Position and rated bond tranches. The originator tranches so as to minimize the sum of the credit spreads paid on the rated tranches. We find that the number of rated tranches is inversely related to the asset pool quality. The price for transferring a unit of expected default risk is inversely related to the number of subordinated tranches, it is higher for the lowest rated tranche, it is very high for the AAA-tranches in true sale-transactions. The price increases with the credit support of a tranche, but declines when the default probability of the portfolio increases.

Keywords: Securitization, information asymmetries, tranching of asset portfolios, risk premia

JEL Classification: G12, G14, G24

Suggested Citation

Weber, Thomas A. and Franke, Guenter, Optimal Tranching in CDO-Transactions (February 13, 2009). Available at SSRN: https://ssrn.com/abstract=1342601 or http://dx.doi.org/10.2139/ssrn.1342601

Thomas A. Weber

University of Konstanz - Department of Economics ( email )

Konstanz, D-78457
Germany

Guenter Franke (Contact Author)

University of Konstanz - Department of Economics ( email )

Fach 147
Konstanz, 78457
Germany
+49 7531 88 2545 (Phone)
+49 7531 88 3559 (Fax)

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