Losses in Investment-Grade Tranches of Synthetic CDO's: A Large Deviations Analysis

12 Pages Posted: 27 Mar 2009 Last revised: 23 Apr 2009

See all articles by Richard Sowers

Richard Sowers

University of Illinois at Urbana-Champaign - Department of Mathematics

Date Written: March 26, 2009

Abstract

Rare events are an important part of the financial world. For instance, investment-grade financial products by design should suffer losses only rarely. In many cases, this is accomplished by pooling a large number of assets and trancheing the losses. This often leads to a very complex system. We the theory of large deviations, a collection of tools for studying the origination and transformations of rare events, to address some of these issues in losses in senior tranches of synthetic collateralized debt obligations, which in some sense is an archetype of structured finance. Our calculations are fairly self-contained.

Keywords: rare events, synthetic collateralized debt obligations, large deviations

JEL Classification: C63

Suggested Citation

Sowers, Richard, Losses in Investment-Grade Tranches of Synthetic CDO's: A Large Deviations Analysis (March 26, 2009). Available at SSRN: https://ssrn.com/abstract=1368859 or http://dx.doi.org/10.2139/ssrn.1368859

Richard Sowers (Contact Author)

University of Illinois at Urbana-Champaign - Department of Mathematics ( email )

1409 W. Green St.
Urbana, IL 61801
United States

HOME PAGE: http://www.math.uiuc.edu/~r-sowers/

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