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Risk Analysis of Collateralized Debt Obligations

Author

Listed:
  • Kay Giesecke

    (Department of Management Science and Engineering, Stanford University, Stanford, California 94305)

  • Baeho Kim

    (Korea University Business School, Anam-dong, Seongbuk-gu, Seoul 136-701, Korea)

Abstract

Collateralized debt obligations, which are securities with payoffs that are tied to the cash flows in a portfolio of defaultable assets such as corporate bonds, play a significant role in the financial crisis that has spread throughout the world. Insufficient capital provisioning due to flawed and overly optimistic risk assessments is at the center of the problem. This paper develops stochastic methods to measure the risk of positions in collateralized debt obligations and related instruments tied to an underlying portfolio of defaultable assets. It proposes an adaptive point process model of portfolio default timing, a maximum likelihood method for estimating point process models that is based on an acceptance/rejection resampling scheme, and statistical tests for model validation. To illustrate these tools, they are used to estimate the distribution of the profit or loss generated by positions in multiple tranches of a collateralized debt obligation that references the CDX High Yield portfolio and the risk capital required to support these positions.

Suggested Citation

  • Kay Giesecke & Baeho Kim, 2011. "Risk Analysis of Collateralized Debt Obligations," Operations Research, INFORMS, vol. 59(1), pages 32-49, February.
    • Handle: RePEc:inm:oropre:v:59:y:2011:i:1:p:32-49
    DOI: 10.1287/opre.1100.0864
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    References listed on IDEAS

    as
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    Citations

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    Cited by:

    1. Christian Gouriéroux & Alain Monfort & Sarah Mouabbi & Jean-Paul Renne, 2021. "Disastrous Defaults [Risk premia and term premia in general equilibrium]," Review of Finance, European Finance Association, vol. 25(6), pages 1727-1772.
    2. Azizpour, Shahriar & Giesecke, Kay & Kim, Baeho, 2011. "Premia for correlated default risk," Journal of Economic Dynamics and Control, Elsevier, vol. 35(8), pages 1340-1357, August.
    3. Drakos, Anastassios A. & Kouretas, Georgios P., 2015. "Bank ownership, financial segments and the measurement of systemic risk: An application of CoVaR," International Review of Economics & Finance, Elsevier, vol. 40(C), pages 127-140.
    4. Suguru Yamanaka, 2019. "Random thinning model with a truncated credit quality vulnerability factor: Application to top-down-type credit risk assessment," International Journal of Financial Engineering (IJFE), World Scientific Publishing Co. Pte. Ltd., vol. 6(03), pages 1-13, September.
    5. Antonio Di Cesare & Anna Rogantini Picco, 2018. "A Survey of Systemic Risk Indicators," Questioni di Economia e Finanza (Occasional Papers) 458, Bank of Italy, Economic Research and International Relations Area.
    6. Dassios, Angelos & Zhao, Hongbiao, 2017. "Efficient simulation of clustering jumps with CIR intensity," LSE Research Online Documents on Economics 74205, London School of Economics and Political Science, LSE Library.
    7. Cheng, Chunli & Hilpert, Christian & Miri Lavasani, Aidin & Schaefer, Mick, 2023. "Surrender contagion in life insurance," European Journal of Operational Research, Elsevier, vol. 305(3), pages 1465-1479.
    8. Angelos Dassios & Hongbiao Zhao, 2017. "Efficient Simulation of Clustering Jumps with CIR Intensity," Operations Research, INFORMS, vol. 65(6), pages 1494-1515, December.
    9. Jang, Jiwook & Dassios, Angelos, 2013. "A bivariate shot noise self-exciting process for insurance," Insurance: Mathematics and Economics, Elsevier, vol. 53(3), pages 524-532.
    10. Jiwook Jang & Rosy Oh, 2020. "A Bivariate Compound Dynamic Contagion Process for Cyber Insurance," Papers 2007.04758, arXiv.org.
    11. Guo, Nan & Wang, Fang & Yang, Jingping, 2017. "Remarks on composite Bernstein copula and its application to credit risk analysis," Insurance: Mathematics and Economics, Elsevier, vol. 77(C), pages 38-48.
    12. Suguru Yamanaka & Masaaki Sugihara & Hidetoshi Nakagawa, 2012. "Modeling of Contagious Credit Events and Risk Analysis of Credit Portfolios," Asia-Pacific Financial Markets, Springer;Japanese Association of Financial Economics and Engineering, vol. 19(1), pages 43-62, March.

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