64 Pages Posted: 15 Aug 2020 Last revised: 15 Dec 2021
Date Written: December 14, 2021
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