Clo Performance

62 Pages Posted: 1 Nov 2021 Last revised: 11 Nov 2022

See all articles by Larry Cordell

Larry Cordell

Federal Reserve Banks - Federal Reserve Bank of Philadelphia

Michael R. Roberts

The Wharton School - University of Pennsylvania; National Bureau of Economic Research (NBER)

Michael Schwert

AQR Arbitrage, LLC

Multiple version iconThere are 2 versions of this paper

Date Written: October 2021

Abstract

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.

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Suggested Citation

Cordell, Larry and Roberts, Michael R. and Schwert, Michael, Clo Performance (October 2021). NBER Working Paper No. w29410, Available at SSRN: https://ssrn.com/abstract=3953937

Larry Cordell (Contact Author)

Federal Reserve Banks - Federal Reserve Bank of Philadelphia ( email )

Ten Independence Mall
Philadelphia, PA 19106-1574
United States

Michael R. Roberts

The Wharton School - University of Pennsylvania; National Bureau of Economic Research (NBER) ( email )

3620 Locust Walk, #2320
Philadelphia, PA 19104-6365
United States
(215) 573-9780 (Phone)

HOME PAGE: http://finance.wharton.upenn.edu/~mrrobert/

Michael Schwert

AQR Arbitrage, LLC ( email )

Two Greenwich Plaza
Greenwich, CT 06830
United States
2037423005 (Phone)

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