Risk Factors of CLO's and Corporate Bonds

20 Pages Posted: 7 Nov 2019

See all articles by Mark Wahrenburg

Mark Wahrenburg

Faculty of Economics and Business Administration

Andreas Barth

Goethe University Frankfurt - Department of Finance

Mohammad Izadi

Goethe University Frankfurt - House of Finance

Anas Rahhal

Goethe University Frankfurt

Date Written: October 28, 2019

Abstract

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

Wahrenburg, Mark and Barth, Andreas and Izadi, Mohammad and Rahhal, Anas, Risk Factors of CLO's and Corporate Bonds (October 28, 2019). Available at SSRN: https://ssrn.com/abstract=3476555

Mark Wahrenburg

Faculty of Economics and Business Administration ( email )

Theodor-W.-Adorno-Platz 3
Frankfurt am Main, 60323
Germany

Andreas Barth (Contact Author)

Goethe University Frankfurt - Department of Finance ( email )

Theodor-W.-Adorno-Platz 3
Frankfurt, 60629
Germany

Mohammad Izadi

Goethe University Frankfurt - House of Finance ( email )

Grüneburgplatz 1
Frankfurt am Main, DE 60323
Germany

Anas Rahhal

Goethe University Frankfurt ( email )

Grüneburgplatz 1
Frankfurt am Main, 60323
Germany

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