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Loss Allocation in Securitization Transactions

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Author Info

  • Günter Franke

    ()
    (Department of Economics, University of Konstanz, Germany)

  • Markus Herrmann

    ()
    (Landesbank Baden-Württemberg, Germany)

  • Thomas Weber

    ()
    (Axpo Holding AG (Baden) Aargau, Switzerland)

Abstract

This paper analyses the loss allocation to First, Second and Third Loss Positions in European collateralized debt obligation transactions. The quality of the underlying asset pool plays a predominant role for the loss allocation. A lower asset pool quality induces the originator to take a higher First Loss Position, but, in a synthetic transaction, a smaller Third Loss Position. The share of expected default losses, borne by the First Loss Position, is largely independent of asset pool quality, but lower in securitizations of corporate loans than in those of corporate bonds. Originators with a good rating and low Tobin´s Q prefer synthetic transactions.

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Bibliographic Info

Paper provided by Department of Economics, University of Konstanz in its series Working Paper Series of the Department of Economics, University of Konstanz with number 2011-22.

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Length: 56 pages
Date of creation: 26 Apr 2011
Date of revision:
Handle: RePEc:knz:dpteco:1122

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Related research

Keywords: Securitization; collateralized debt obligations; asset pool quality; First Loss Position; synthetic transactions.;

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Cited by:
  1. Wojtowicz, Marcin, 2014. "CDOs and the financial crisis: Credit ratings and fair premia," Journal of Banking & Finance, Elsevier, vol. 39(C), pages 1-13.

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