CLO Performance

We study the performance of collateralized loan obligations (CLOs) to understand the market imperfections giving rise to these vehicles and their corresponding economic costs. CLO equity tranches earn positive abnormal returns from the risk-adjusted price differential between leveraged loans and CLO debt tranches. Debt tranches offer higher returns than similarly rated corporate bonds, making them attractive to banks and insurers that face risk-based capital requirements. Temporal variation in equity performance highlights the resilience of CLOs to market volatility due to their closed-end structure, long-term funding, and embedded options to reinvest principal proceeds.

Keywords: collateralized loan obligations, leveraged loans, securitization

JEL Classification: G23, G11

Suggested Citation: Suggested Citation

Cordell, Larry and Roberts, Michael R. and Schwert, Michael, CLO Performance (December 14, 2021). Jacobs Levy Equity Management Center for Quantitative Financial Research Paper, Journal of Finance, Forthcoming, Available at SSRN: https://ssrn.com/abstract=3652124 or http://dx.doi.org/10.2139/ssrn.3652124