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Tranching and Pricing in CDO-Transactions

Author

Listed:
  • Günter Franke

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

  • Thomas Weber

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

Abstract

This paper empirically investigates the tranching and tranche pricing of European securitization transactions of corporate loans and bonds. Tranching allows the originator to issue bonds with strong quality differences and thereby attract heterogeneous investors. We find that the number of differently rated tranches in a transaction is inversely related to the quality of the underlying asset pool. Credit spreads on tranches in a transaction are inversely related to the number of tranches. The average price for transferring a unit of expected default risk, paid in a transaction, is inversely related to the default probability of the underlying asset pool. The average price, paid for a tranche, increases with the rating of the tranche, it is higher for the lowest rated tranche and very high for AAA-tranches in true sale-transactions. It varies little across butterfly spreads obtained from rated tranches except for the most senior spread.

Suggested Citation

  • Günter Franke & Thomas Weber, 2011. "Tranching and Pricing in CDO-Transactions," Working Paper Series of the Department of Economics, University of Konstanz 2011-21, Department of Economics, University of Konstanz.
  • Handle: RePEc:knz:dpteco:1121
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    File URL: http://www.uni-konstanz.de/FuF/wiwi/workingpaperseries/WP_21-11-Franke-Weber.pdf
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    References listed on IDEAS

    as
    1. Ait-Sahalia, Yacine & Lo, Andrew W., 2000. "Nonparametric risk management and implied risk aversion," Journal of Econometrics, Elsevier, vol. 94(1-2), pages 9-51.
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    More about this item

    Keywords

    Securitization; information asymmetries; tranching of asset portfolios; risk premiums of tranches;

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage

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