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Market share and risk taking: the role of collateral asset managers in the collapse of the arbitrage CDO market

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  • Thomas Mählmann

    (Catholic University of Eichstaett-Ingolstadt)

Abstract

Asset pricing theory predicts that if credit ratings do not reflect all relevant aspects of a CDO debt tranche’s risk profile (i.e., its total and systematic risk), then ratings-based tranche pricing by some naïve investors creates incentives for CDO arrangers to take excessive non-priced risk. CDO managers’ desire for repeat issuance makes them part of this risk taking strategy to exploit naïve investors. The implication is that the credit quality of CDOs run by large market share managers has a higher tendency to deteriorate in bad times. This paper finds empirical evidence for large market share manager’s conflicts of interest.

Suggested Citation

  • Thomas Mählmann, 2016. "Market share and risk taking: the role of collateral asset managers in the collapse of the arbitrage CDO market," Review of Quantitative Finance and Accounting, Springer, vol. 47(2), pages 273-303, August.
    • Handle: RePEc:kap:rqfnac:v:47:y:2016:i:2:d:10.1007_s11156-015-0501-9
    DOI: 10.1007/s11156-015-0501-9
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    More about this item

    Keywords

    Conflict of interest; Credit rating; Collateralized debt obligation; Systematic risk;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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