A Bottom-up, Reduced Form Credit Risk Model Approach for the Determination of Collateralized Loan Obligation Capital

28 Pages Posted: 22 Mar 2023

See all articles by Robert A. Jarrow

Robert A. Jarrow

Cornell University - Samuel Curtis Johnson Graduate School of Management

Donald R. van Deventer

Kamakura Corporation

Date Written: January 1, 2023

Abstract

This paper uses a bottom-up, reduced form credit risk model with hazard rate estimated default probabilities to compute various collateralized loan obligation (CLO) tranches’ loss probabilities and capital factors. It is shown that with respect to the loss probabilities, credit rated CLO tranches are less risky than comparably rated corporate bonds. In addition, a similar argument can be made that corporate debt loss rates will be on average larger than an equally rated CLO tranche's loss rate. And, with respect to the capital factors, it is shown that NAIC capital factors are typically larger than value-at risk based capital factors computed using a bottom-up, reduced form credit risk model.

Suggested Citation

Jarrow, Robert A. and van Deventer, Donald R., A Bottom-up, Reduced Form Credit Risk Model Approach for the Determination of Collateralized Loan Obligation Capital (January 1, 2023). Available at SSRN: https://ssrn.com/abstract=4352677 or http://dx.doi.org/10.2139/ssrn.4352677

Robert A. Jarrow (Contact Author)

Cornell University - Samuel Curtis Johnson Graduate School of Management ( email )

Department of Finance
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United States
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Donald R. Van Deventer

Kamakura Corporation ( email )

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HOME PAGE: http://www.kamakuraco.com

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