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A bottom-up, reduced form credit risk model approach for the determination of collateralised loan obligation capital.

Authors :
Jarrow, Robert
van Deventer, Donald R.
Source :
Journal of Risk Management in Financial Institutions; Summer2023, Vol. 16 Issue 3, p237-255, 19p
Publication Year :
2023

Abstract

This paper uses a bottom-up, reduced form credit risk model with hazard rate estimated default probabilities to compute various collateralised loan obligation (CLO) tranches' loss probabilities and capital factors. It is shown that with respect to the loss probabilities, credit rated CLO tranches are less risky than comparably rated corporate bonds. In addition, a similar argument can be made that corporate debt loss rates will be on average larger than equally rated CLO tranche loss rates. And, it is shown that the National Association of Insurance Commissioners (NAIC) capital factors are typically larger than value-at-risk based capital factors. The policy implication is that NAIC capital factors distort investment incentives by requiring too much capital for CLOs relative to equally rated corporate debt. [ABSTRACT FROM AUTHOR]

Details

Language :
English
ISSN :
17528887
Volume :
16
Issue :
3
Database :
Complementary Index
Journal :
Journal of Risk Management in Financial Institutions
Publication Type :
Academic Journal
Accession number :
164305769
Full Text :
https://doi.org/10.69554/silj4627