Optimal structuring of collateralized debt obligation contracts: an optimization approach

This paper uses a unique data set of more than 1000 synthetic Collateralized Debt Obligations (CDOs) deals to describe typical structures, their pricing and performance with the aim of identifying the factors behind the spectacular collapse of this important segment of structured credit market in late 2008. The data suggests that mark-to-market losses on many synthetic CDO tranches were much more significant than in case of simpler, lower-rated products despite the former experiencing little or no impairment of the notional. The losses were driven instead by the concentration of relatively limited number of defaults in a short period of time, suggesting that pre-crisis pricing must have seriously underestimated such risk of default clustering. In view of the post-crisis pick-up in synthetic CDO issuance, the paper attempts to heed this lesson and offer a simple factor model of default correlation in the spirit of Marshall–Olkin that is naturally suited to capturing the temporal dimension of default dependencies that have been crucial for synthetic CDOs investors. The model allows building a rich dependence structure capable of consistently fitting standardized iTraxx and CDX index tranches, which makes it ideal for pricing bespoke CDOs.

Chapter 2 - The Goldman Sachs Swaps Shop: An Examination of Synthetic Short Selling through Credit Default Swaps and Implications of Securities and Exchange Commission v. Goldman Sachs & Co., et al.

Will the Leveraged Loan Market Trigger a Financial Pandemic? Understanding Cov-Lite Loans, CLOs and EBITDA Add-Backs

Pricing Synthetic CDOs Using a Three Regime Random-Factor-Loading Model

Derivative Instruments and the Financial Crisis 2007-2008: Role and Responsibility

Financial Adaptation to Climate Change via Public Interest Weather Derivatives and Catastrophe Bonds in the Wake of the Financial Meltdown

최근(2008년) 국제금융위기를 초래한 여러 변수들 중, 사회적인 소득불균형와 금융위기에 대한 대응책의 미흡 등의 문제들을 포함한 거시경제변수들 중, 특히 2가지 요인들에 주목할 필요가 있다. 즉, 2000년 이후부터 지속되어 온, 국제적 무역 불균형과 통화정책 상의 오류라는 요인들이다. 특히 후자의 경우, 2000년대 초반부터 지속된 경제의 불확실성 확대가 연방중앙은행이 저금리정책을 유지하게 된 주된 요인이 되었으며, 이로 인한 자본시장의 과도한 유동성이 시장참여자들로 하여금 시중 금리이상의 수익률을 추구하는 금융상품을 찾기에 비정상적 노력을 기울이도록 유도하였다. 본 논문에서는 상기 거시경제적인 변수와 관련하여, 국제금융위기의 직접적이고 미시적인 원인으로 간주되고 있는 장외파생상품에 대한 분석과 실증적 연구를 수행하였다. 금융위기 상황 이전의 장외파생상품들에 대한 과도한 투자열기, 특히, 신용부도스왑(Credit Default Swap, CDS)의 국제 자본시장에서의 과열된 매매가 최근의 국제금융위기를 초래한 직접적인 원인이 되었다고 판단되기 때문이다. 본 논문의 기여점으로는 자본선진국들에서는 CDS의 스프레드(프리미엄)에 대한 결정요인들에 대한 연구가 지속적으로 이루어 졌으나, 국내 기업들에 대한 결정요인에 대한 연구는 상대적으로 미약하였다는 점이라 할 수 있다. 본 연구의 방법론으로서 산업효과를 고려한 다중회귀식을 이용한 결정요인들에 대한 유의성 검정이며, 설명변수들 중에서, 국고채(만기 3년) 수익률, 시가-장부가 비율, 그리고 기업규모가 국내 기업들의 CDS 스프레드 의 유의한 결정요인이었다. 첫 장에서는 최근의 국제금융위기관련, 그에 대한 원인분석을 서술하였으며, 둘째 장에서 부채담보부증권과 신용부도스왑에 대한 구체적 개념을 설명하였다. 다음으로 국내 기업들 중, 국제적으로 CDS 스프레드가 거래되는 표본기업들을 대상으로 결정요인 분석을 실증적으로 수행하였다. 마지막 장의 결론 부분에서는 요약과 향후 연구에 대한 내용을 서술, 제시하였다. Among several macroeconomic missteps blamed for the recent global financial crisis including the social problems of income distribution and the lack of proper financial remedies, two of them have received particular attention: the global BOP(Balance of Payment) imbalance and the misguided monetary policy. Such BOP imbalance was blamed for massive foreign exchange investment flows from Asia into the U.S., triggering the financial and real estate bubble in America. The latter refers to the excessively loose monetary policy of the U.S. Federal Reserve, which pushed financial institutions and households into reckless investment behavior in search of higher returns. Given the abuse of certain innovative financial techniques and new investment instruments that have been created in recent decades, both collateralized debt obligations (CDOs) and credit default swaps (CDS) enjoyed a symbiotic and toxic relationship prior to the financial crisis This paper is organized as follows: The first section analyzes the real causes of the recent financial crisis. The second details the role of CDOs and CDS. Then, to identify key determinants of the CDS spreads in an emerging capital market, the sample data of major Korean firms' CDS spreads are used to estimate the risk premium by utilizing the multiple regression analysis. The empirical test result indicates that Korean 3-year treasury bond rate(TYIELD), market to book value ratio(MV/BV), and assets size(INASSETS) are shown to demonstrate statistically significant influences on the changes of the CDS premium for sample firms.

Collateralized Debt Obligations

A semiparametric factor model for CDO surfaces dynamics

Chapter 5 - Stock Markets, Derivatives Markets, and Foreign Exchange Markets

10 - Portfolio default swaps

The one-factor Gaussian model is well known not to fit the prices of the different tranches of a collateralized debt obligation (CDO) simultaneously, leading to the implied correlation smile. Recently, other one-factor models based on different distributions have been proposed. Moosbrucker [12] used a one-factor Variance-Gamma (VG) model, Kalemanova et al. [7] and Guegan and Houdain [6] worked with a normal inverse Gaussian (NIG) factor model, and Baxter [3] introduced the Brownian Variance-Gamma (BVG) model. These models bring more flexibility into the dependence structure and allow tail dependence. We unify these approaches, describe a generic one-factor Levy model, and work out the large homogeneous portfolio (LHP) approximation. Then we discuss several examples and calibrate a battery of models to market data.

The thesis explores the effects of buyer-supplier networks on asset pricing and merger activity and lays down the theory of external auditing. The dissertation is composed of three parts. In the first part we propose a structural model of firm dependence in a vertically connected network of firms based on cash-flows between the buyers and suppliers. We prove that in a closed network economy the set of equivalent martingale measures depends only on the topology of the network. Network market model induces contagion effects. We develop semi-analytical formulas for corporate debt, credit default swaps and collateralized debt obligations. We test the empirical validity of the model on the subcontractors’ network of the SwissAir Group. The yield spread average relative prediction error is 18% comparing to the 89% error of the Merton model. The second part of the dissertation examines firms’ merger activity and its effect on stock prices based on the risk mitigation by creating an internal capital market. We propose a solution concept for coalitional games without superadditivity, which extends the Shapley value, and apply it to the merger activity of firms in a network. The possibility of a merger increases the equity value of standalone firms. Higher network dependence increases merger activity and merger surplus. Increased leverage ratio generates an inverted U-shaped curve of merger activity. The merger is rarely of conglomerate type affirming previous empirical evidence and occurs predominately between either buyers or suppliers depending on which party dominates the other in number. The third part of the thesis develops a model of optimal auditing behavior when cash flows to the firm are observed imperfectly by the outside investors. An external auditor’s report produces a verifiable signal and reduces the observed cash flow volatility. Using the results in information theory we develop explicit formulas for firm’s share price under auditing. The shareholders and debtholders in a firm disagree about the optimal auditing effort which primarily shields debtholders. Under sufficiently favorable economic conditions we obtain that the first best audit contract is offered irrespective of the bargaining power and the number of auditors. Finally we develop the auditing profits and firm values for a multi-unit firm which lays ground for empirical testing. Keywords: Asset pricing, credit risk, contagion, buyer-supplier networks, network topology, mergers, coalitional games without superadditivity, optimal auditing, auditor’s revenues, entropy. JEL (2007): C02, C16, C65, G12, G13, M42, C71, G34, C71, C78.

The 3e of this well-respected textbook continues the tradition of providing clear and concise explanations for fixed income securities, pricing, and markets. The book matches well with fixed income securities courses. The book's organization emphasizes institutions in the first part, analytics in the second, selected segments of fixed income markets in the third, and fixed income derivatives in the fourth. This enables instructors to customize the material to suit their course structure and the mathematical ability of their students. In this title, new material on Credit Default Swaps, Collateralized Debt Obligations, and an integrated discussion of the Credit Crisis have been added. Online Resources for instructors on password protected website provides worked out examples for each chapter. A detailed description of all key financial terms is provided in a glossary at the back of the book.

This panel was held on Monday, January 28, 2013, at the ASF 2013 conference. Panelists discussed the developing impact of swap regulation on securitization and what it means for the ability to use swaps in securitization as new regulations take effect. The Dodd–Frank Act added a definition of the term “commodity pool,” and the Commodity Exchange Act revised the definition of the term “commodity pool operator.” As a result, many securitizations that held swaps, often solely to hedge interest rate or currency mismatches between their assets and their liabilities, were at risk of being considered commodity pools. By the time the panel took place, however, the Commodities Futures Trading Commission had granted two significant pieces of interpretive guidance and no-action relief that together excluded most traditional securitizations (e.g., credit card or auto loan securitizations), most asset-backed commercial paper programs, many CLOs and CDOs (collateralized loan obligations and collateralized debt obligations), and most covered bond transactions from the definition of a commodity pool. The panel focused on the relief that was granted and the issues that remained to be resolved. The panel also discussed the aspects of entering a swap that would be different for a securitization now than it would have been a year ago. The most significant changes have not yet become effective. Those include clearing and margin requirements and, eventually, a requirement to transact on a designated contract market or swap execution facility if the swap has been “made available to trade” on such a facility. One of the cornerstones of Dodd–Frank’s swap regulations is the requirement that swaps be cleared through a central counterparty. Whether a swap will need to be cleared depends on the identities of the counterparties, the nature of the swap, and whether a derivatives clearing organization is willing to clear it. Even if a swap is not required to be cleared, it may still be subject to margin requirements and margin calls. <b>TOPICS:</b>Interest-rate and currency swaps, credit default swaps