On the Design of Collateralized Debt Obligation-Transactions

Posted: 6 Mar 2007

See all articles by Guenter Franke

Guenter Franke

University of Konstanz - Department of Economics

Markus Herrmann

Deutsche Bank AG - Global Markets

Thomas Weber

University of Konstanz - Department of Economics

Date Written: March 2007

Abstract

The strong growth in collateralized debt obligation transactions raises the question how these transactions are designed. The originator designs the transaction so as to maximize her benefit subject to requirements imposed by investors and rating agencies. We analyse a set of European transactions and find that the asset pool quality, measured by the weighted average default probability and the diversity score of the pool, plays a predominant role for the transaction design. Characteristics of the originator play a small role. A lower asset pool quality induces the originator to take a higher First Loss Position and renders a synthetic transaction less attractive. In these transactions the senior, least information sensitive tranche is not sold. The size of this tranche tends to decline with asset pool quality. Both, the weighted average default probability and the diversity score of the pool appear to positively affect the number of tranches and the credit spread of the lowest rated tranche.

Keywords: Securitization, collateralized debt obligations, asset pool quality, First Loss Position, synthetic transactions, tranching

JEL Classification: G 10, G 21, G 24

Suggested Citation

Franke, Guenter and Herrmann, Markus and Weber, Thomas A., On the Design of Collateralized Debt Obligation-Transactions (March 2007). EFA 2007 Ljubljana Meetings Paper. Available at SSRN: https://ssrn.com/abstract=967414 or http://dx.doi.org/10.2139/ssrn.967414

Guenter Franke (Contact Author)

University of Konstanz - Department of Economics ( email )

Fach 147
Konstanz, 78457
Germany
+49 7531 88 2545 (Phone)
+49 7531 88 3559 (Fax)

Markus Herrmann

Deutsche Bank AG - Global Markets ( email )

Grose Gallusstr. 10-14
60272 Frankfurt am Main
Germany

Thomas A. Weber

University of Konstanz - Department of Economics ( email )

Konstanz, D-78457
Germany

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