Simulation methods for risk analysis of collateralized debt obligations

Author

Morokoff, William J.

Author_Institution

New Product Res., Moody´´s KMV, San Francisco, CA, USA

Volume

1

fYear

2003

fDate

7-10 Dec. 2003

Firstpage

335

Abstract

Collateralized debt obligations (CDOs) are sophisticated financial products that offer a range of investments, known as tranches, at varying risk levels backed by a collateral pool typically consisting of corporate debt (bonds, loans, default swaps, etc.). The analysis of the risk-return properties of CDO tranches is complicated by the highly non-linear and time dependent relationship between the cash flows to the tranche and the underlying collateral performance. This paper describes a multiple time step simulation approach that tracks cash flows over the life of a CDO deal to determine the risk characteristics of CDO tranches.

Keywords

credit transactions; finance; investment; risk analysis; simulation; CDO deal; bonds; cash flow tracking; collateral performance; collateral pool; collateralized debt obligations; corporate debt; default swaps; financial products; investments; loans; multiple time step simulation; nonlinear relationship; risk analysis; risk characteristics; risk levels; risk-return properties; simulation methods; time dependent relationship; tranches; Analytical models; Finance; Investments; Law; Legal factors; Marketing and sales; Performance analysis; Portfolios; Risk analysis; Security;

fLanguage

English

Publisher

ieee

Conference_Titel

Simulation Conference, 2003. Proceedings of the 2003 Winter

Print_ISBN

0-7803-8131-9

Type

conf

DOI

10.1109/WSC.2003.1261441

Filename

1261441