Risk Factors of CLO's and Corporate Bonds
20 Pages Posted: 7 Nov 2019
Date Written: October 28, 2019
Structured products like collateralized loan obligations (CLOs) tend to offer significantly higher yield spreads than corporate bonds with the same rating. At the same time, empirical evidence does not indicate that this higher yield is reduced by higher default losses of CLOs. The evidence thus suggests that CLOs offer higher expected returns compared to corporate bonds with similar credit risk. This study aims to analyze whether this return difference is captured by asset pricing factors. We show that market risk is the predominant risk factor for both corporate bonds and CLOs. CLO investors, however, additionally demand a premium for their risk exposure towards systemic risk. This premium is inversely related to the rating class of the CLO.
Keywords: Structured Finance, Corporate Bond, CLOs, Factor Model, Risk Factors
JEL Classification: G11, G12
Suggested Citation: Suggested Citation