Active Loan Trading
45 Pages Posted: 7 Jul 2017 Last revised: 21 Feb 2018
Date Written: February 20, 2018
Analyzing a novel dataset of leveraged loan trades executed by managers of collateralized loan obligations (CLOs), we document the importance of "active loan trades" -- trades executed at a manager's discretion. Active loan sales are conducted at better prices than non-active sales and before rating downgrades. More active CLOs trade at better prices than less active CLOs, selling leveraged loans earlier and before they get downgraded. More active trading also increases the returns to equity investors and lowers collateral portfolio default rates. In contrast, tests with a placebo variable, capturing passive turnover, lead to insignificant results.
Keywords: Active management, Collateralized loan obligations (CLOs), Market efficiency, Structured finance, Syndicated loans
JEL Classification: G11, G12, G23, G24
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